With the continued growth of the ESG lens on investment management, DFMs have moved to accommodate this trend with a raft of portfolios and management approaches to meet a host of differing needs.
Historically, many ESG solutions in this market started out from the full discretionary service, looking across all types of stocks and funds, picking out those investments that met particular requirements or exclusions that the investor wished to impose upon their portfolio. These often referred to themselves as “green” or “ethical” solutions and were seen as very niche when set against the wider market. These “green shoots” have grown into the much broader range of solutions we now see on offer, but still suffer with one major obstacle.
Advice is often seen as the greatest source of inertia to ESG. Whilst there are those advisers who have systems and processes that have fully embraced ESG and the screens and filters that can be applied, for many more their systems require additional support, and this can create a natural aversion to this type of investing. Historically, this did not pose an issue for the rare occasion that this need was expressed, but now the pressure is coming to bear. This is where DFM solutions can take much of the strain away from the adviser – with someone waiting on hand to meet the ESG investment needs, whilst the adviser retains their key financial planning role. As ever, the partnering of customer to investment solution is still something where the adviser plays a key role as match maker, so it is important that when looking for a solution for the ESG customer that the adviser takes into account some key considerations:
1. Ensure that a common language is used to describe ESG – ask ten different people what it means and you are likely to get ten different flavours that are rarely the same – try and avoid this type of challenge by having an aligned set of language, both at advice business and solution level. It avoids confusion.
2. There is no “one size fits all” – expect to operate a number of solutions for customers, across model and advisory portfolios, to meet the differing demands of customers – you need to consider categorising solutions to meet particular needs.
3. Ensure you are clear on what the customer wants out of their ESG solution – is it a general view and belief they have or are there more specific concerns? The latter type of customer, depending upon how detailed their needs are, may well be more aligned to an advisory portfolio to efficiently navigate their views. Stating the obvious here, but there will always be those customers that latch on to jargon without understanding its meaning, so it is important to get a clear view on what is desired.
4. Ensure that the solution is actually delivering on its ESG credentials – you need to check that it isn’t merely a lick of green paint over the door to give the impression of ESG investing. This is particularly key for model portfolios, where the outputs from the portfolio should continue to demonstrate their credentials through regular reports.
5. For those solutions suggesting that they will influence business on ESG matters, does it really have the scale or ability for this influence to be meaningful – there are those solutions out there promising they can clean up “dirty” or non-ethical businesses that either cannot or will not deliver on this promise, as well as those that can.
6. Understand how volatility compares with a more traditional portfolio – there are some portfolios which will show higher levels of volatility and there are managers that now successfully balance this. The old adage of smaller stocks and increased volatility do not necessarily have to apply.
As more and more regulation unfolds in the corporate pensions market, driving ESG as a core requirement, it is only a matter of time before this cascades down into the retail investment markets. Taking steps now to build this into the advice model could reap big dividends in the future and, if nothing else, allows an advice business to more efficiently meet a wider range of customer needs.
Rory Gravatt is a Consultant at Altus