ESG engagement – the client perspective

Square Mile head of consulting and ESG Clarity editorial panellist Diane Earnshaw says consultants have an important role as industry evolves rapidly

There is a wide variety to the approaches taken by the investment industry, from IFAs and wealth managers to fund platforms and distributors, by which they try to deliver the best investment outcomes for their clients. 

However, one theme in common that we are increasingly seeing is a desire to identify solutions that meet the growing demand for ESG integrated and responsible investing options.

The growth in this section of the market comes from both the demand and the supply side and is multi-faceted.  It comes from the bottom up: from investors who care about how their savings and pension funds are being invested in a world of climate change and inequality. It is also being driven from the top down, as regulators issue directives forcing the consideration of ESG and responsible investing issues into an adviser’s suitability process.

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A survey conducted by Square Mile earlier this year at a series of Personal Finance Society roadshows found that 54% of advisers were not asking about ESG preferences in their attitude to risk questionnaire or fact find process and only 39% had incorporated it into their centralised investment propositions. However, thanks to the incoming regulatory changes, this will almost certainly have to change. From the supply side, meanwhile, asset managers and MPS services in the UK and globally are launching new responsibly themed products and expanding their capability in this space at pace.

One of the biggest challenges we face as consultants is applying a clear and consistent use of terminology.  There is so much confusion over what terms mean and everyone seems to have different interpretations of what ESG means to them. There is no standardised industry terminology currently so the skill of consulting – which has always primarily been about listening to your clients – is all the more important given this backdrop. Consultants need to listen carefully to make sure we are on the same page as their clients and that they clearly articulate their approach to avoid misunderstandings.

While the Investment Association has constructed a framework to guide this, there is still no common approach adopted by all. At Square Mile, we have defined our own framework and methodology, broadly aligned with that of the IA,  guiding our approach to both ESG and responsible investment. We see ESG and responsible investment as distinct but interlinked. The analysis of ESG factors is an input into the investment process, or another lens through which a fund manager might carry out their fundamental research into a company. Indeed, it can be used as a risk mitigation exercise or as a means for identifying market opportunities.

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Over the last 12 to 18 months, recognition of the impact of ESG factors on a company’s share price and prospects has become mainstream and it is an area that many asset management groups and fund managers have been embracing within their own approaches. It is therefore relevant to assess all funds on this basis, not just those that have an explicit responsible investing mandate. It is also important to assess how fund management groups as a whole incorporate ESG into their operations. These considerations at fund and company level can help clients ensure the right funds make their way through the fund selection process.

In our view, responsible investment differs from ESG analysis in that it actively aims to use investment as a way of creating a better outcome for the environment and or society. It can be seen as an umbrella term from which stem the three broad categories of investment approach that fund assessments can be based on: exclusion, sustainability and impact. These are broad categories and some funds may use a combination of approaches, for example, an impact fund will likely exclude certain companies or sectors because they do not align with the intentionality of the investment approach.

The asset management industry is responding fast to these new trends. They are rapidly incorporating ESG analysis and tools into their businesses and we are seeing many new fund launches, as asset managers look to meet demand and increase their distribution footprint.  However, this does present challenges to consultants and clients alike. Greenwashing is undoubtedly something to be aware of, as the bandwagon is gaining pace.

Moreover, the intentionality to avoid harm and do good, while easily identifiable as an objective, is much harder to evidence in practice. Both asset managers and consultants alike are working hard to develop tools to help measure a fund’s impact and to evidence the footprint of funds in the market. These developments are to be welcomed to help weed out any imposters. Regulation is likely to evolve in order to help protect investors in an area where they may be vulnerable to misunderstanding.  It is unclear if the forthcoming EU taxonomy will help or lead to further confusion. We hope it’s the former.

Consultants need to remain dynamic and embrace and respond to change as the industry evolves rapidly. We have an important role as enablers for change, in what is an exciting time for all of those passionate about responsible investing.

Diane Earnshaw is head of consulting at Square Mile and ESG Clarity editorial panellist

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...