How to make responsible investment reporting adviser- and client-friendly

Consider the firm's approach and metrics but also what clients want and need to know

If you work in responsible investment, you will be well aware of the plethora of regulation coming your way. A good chunk of this is focused on disclosure to the end investor – that’s your clients and advisers. While this is admirable, there are questions about how useful and accessible some of this disclosure will be to the consumer. The real conundrum is how do you deliver accessible and meaningful responsible investment reporting to your clients and advisers?

A good way to start is to ask: what is responsible investment reporting? It is not a fund or portfolio score provided by an ESG ratings agency. Reporting should encompass a number of different elements and here’s some thoughts on what you might want to consider.

What is the firm’s approach?

First, if the firm is touting itself to be a responsible investor there will be several elements to its approach – therefore the reporting should incorporate these. In essence the work being undertaken by the firm (not just a data dump from your ESG ratings provider of choice) should be the point of the exercise.

These could include the following: voting statistics and the rationale for the voting decision (a bunch of numbers on their own is not useful); examples of engagements for the underlying investments (with objective and outcomes); examples of how the integration of ESG factors works within the investment process; and finally metrics.

What metrics do they use?

Second, the metrics used need to be client friendly with qualitative commentary crafted alongside. The big question is which metrics should be used? Presumably climate metrics are a good starting point – if we follow Taskforce for Climate-related Financial Disclosure guidance we would use Weighted Average Carbon Intensity (Waci) and compare this to the appropriate benchmark. That might be of interest to some clients, however unless you are targeting a reduction in Waci, is it that helpful?

Another way to look at this might be to assess the percentage of the portfolio’s holdings that have a commitment in some form or another to net zero. What non-climate metrics might be of interest? At the moment it’s a bit of a head scratcher as you want to future proof reporting in line with the UK taxonomy and ISSB, but we don’t know what those look like yet. In fact, that is a whole other topic – there is a raft of responsible and sustainable investment focused regulatory change on its way however at this point it is all separate bits of a jigsaw which makes it harder to build a future-proofed reporting and disclosure framework as we don’t know what the end product will look like.

What do clients and advisers need to know?

Third, how do we align reporting to clients’ and advisers’ preferences? Perhaps what we actually need to do is engage with the client and adviser community to find out what might be interesting to them?

Clients will have different levels of interest in responsible investment, and within that there will be different skews. For some, the diversity of senior leadership is extremely important, for others it is how a company recycles – well not quite but you get what I mean. If we compare this to exclusions that clients may have for their investments, while some are common, clients don’t all have the same concerns. What is an issue or interest for one client will not be the same for every client. So how do we try to align this?    

Through the suitability cycle we are identifying clients’ responsible investment preferences. These reflect the degree of interest that they place on ESG factors being integrated into portfolio construction. It would seem a reasonable conclusion to believe that clients in the category that is most focused on ESG factors (and indeed sustainability) will be most interested in responsible investment reporting. Therefore, from this we can try to tailor the availability of reporting in line with their responsible investment preference.

The elephant in the room is that for some clients this really is not of any interest whatsoever, and indeed to some can be seen as being a negative. We don’t want to bombard clients with reporting that is not of interest to them and so we need to think about building modular reporting in order to be able to offer a pick and mix approach (without the liquorice laces) – or indeed turn off the reporting (unless required by the regulator) in order to meet different requirements.

This is all while trying to deliver the reporting in an accessible way. The responsible investment world is in love with a TLA (three letter acronym) and I know some of my colleagues think we make them up just to mess with them – we don’t. It’s a challenge, however the industry needs to work to make this more accessible to the end consumer and to not hide behind data that are meaningless in isolation.