This is the fourth post in our September Investment Forum Highlights series. Our expert speakers Elizabeth Stuart and Anastasia Georgiou from Morningstar, and Mikkel Bates from FE Fund Info shared essential information for advisers about discussing ESG with clients, meeting changing regulations, and following your clients’ values regarding sustainable investments.

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ESG has to gain an attitude like risk. We need a standardized set of criteria so loads of time and money isn’t wasted in figuring things out. Is the ESG public statement just for larger firms of IFAs as well?

Jane Hodges:

I’ve got so many things to say, I don’t know how I’m going to get them all into one question. And very firstly, Ian you were absolutely right about it. This has got to become like an attitude to risk. And the worst fear I have is that every single bugger is going to do so many different types of questions, and we’re all going to have to pick a profiler and then we’re going have to map every single fund. And then we’re going to have to map over to more, and it’s just going to be like the 20 years of pain attitude to risk has become.

So is there any group that’s going to try and stand up and try and properly standardize this so that we end up with one set? That means that every fund mapped onto this one set of criteria, and for advisers, we don’t waste loads of money and time of our customers trying to figure it out. My first question.

Second one, this conversation, it seems, does it apply to wire IFA because I don’t put things on my website about my view on how I’m going to invest their money sustainably, because my job is to figure out what their passions are and then to go to the market and find the funds or the MPS solutions that might them, it’s not my job to push them into my way of doing it. So it’s not.

So when we’re talking about putting statements on websites, so they can tell between what one advisor, what style of investments they’re doing. We mean that for people who just had CIPs, larger firms, maybe who don’t, who aren’t independent and and just using their own central philosophy, or, or do you feel that that applies to IFAs as well? And how would it apply to an IFA? They’re my two most important ones.

There needs to be a statement of how you incorporate sustainability risks into the advice process and what criteria you use to look at fund groups.

Mikkel Bates:

Well, that’s, you know,  the gist of what I was talking about, the disconnect between the various stages, you obviously want to do what your clients want you to do, but they’re also coming to you for advice rather than just to tell you, so they’re expecting you to tell them.

But there needs to be a statement of how you incorporate sustainability risks into the advice process, what you look for in fund groups when considering sustainability and so on. So you need to show that you consider sustainability and sustainability risks in your advice process and in fund selection process. If you feel, and again, you can ask your clients, you need to ask your clients, “do you want to consider ESG in the investments?” And if they say, no, well…

As an advice firm we don’t have a standpoint ourselves that we then apply to our clients, we base everything on their values.

Jane Hodges:

We’ve been doing that for years. So that hasn’t changed for us. The issue is we don’t have a standpoint ourselves as an advice firm that we’re trying to make our clients move into and I’ve never ever heard before that there’s a requirement for me to do so. So maybe I’m just having to catch up here. I don’t know what the others are sort of thinking about this, but if you had a CIP, I could understand that because you’re going to put these clients into your CIP. And therefore you’re going to have a standpoint in your own portfolio solutions. But if you’re an IFA, you don’t work like that. You go to the market, you find there are funds that are going to match you, you work out with your clients what that investment solution is going to look like. And I’ve never heard before that I’m going to be made to push my clients into a sustainable position or one that matches me. So that’s the bit I’m just trying to understand.

It’s a broad policy statement about how you would asses sustainability if that’s what a client wanted.

Anastasia Georgiou:

I don’t think it’s about having to put state, that you will provide your clients with sustainable advice. I think it’s more about, how you would do it or how you would assess it. So it could be quite a broad policy statement, so if somebody is looking for this, this is what we would do.

ESG has become an open conversation rather than a list of exclusions. It’s good to have a stance as a starting point to help guide the client and bring clarity to the conversation.

Declan McAndrew:

We’ve just kind of incorporated the sustainability piece into our suitability assessment, along with the risk profile and capacity of loss. So unlike the old days where you might go, “are you interested in ethical investments?” Yes/no, and then you flip over to a massive 40 questions of exclusion categories. It’s very much laid out in an open conversation piece.

So a lot of soft skills are required by the advisor, but that piece is backed up by our policy about what we define as ESG and sustainable investing. And I would agree with Mikkel very much , it is a two way guidance piece with some clients where they have some very rigid views, but where what is and isn’t achievable is quite clear, but they need guidance . -. We’re not order takers because we’re going to advide, but we need to have a stance that we start off from, in terms of that conversation. Otherwise the client will get nowhere and they go, “well, you know, I’m confused as hell”.

We have 300 advisers and I don’t see a way around outsourcing to a DFM or MPS. This is furthering advisers becoming less investment managers and more financial planners.

Adam Smith:

Yeah, I think it’s in your comment on ambulance chasers, after the conversation gets me more worried, because we work with a DFM partner who I’ve seen do a questionnaire with sort of an attach process as to how they properly take a client through and get preferences in detail that enables them for a pretty significant cost to come up with a portfolio, that maps to it.

We’ve got 300 advisors. I wouldn’t be that comfortable with any of them having that conversation. I think that’s the massive issue, that if you start with that first question, which is, “do you want sustainability to be considered?” I think unless you’re an adviser who specializes in that area, your only option is to then say, well, I need to either outsource this to a DFM or an MPS basis to someone that offers a solution that works. And I honestly cannot see the way around it.

So all I can see this doing is further accelerating the process for advisers to become less and less– and this is probably a good thing– investment managers and more and more financial planners, to me that if the client does have complex preferences, they put them in touch with someone who is adequately trained and qualified to understand those preferences and have that conversation in detail.

Its very difficult to create a template that fund groups can use objectively that will tell them if a fund is suitable for people with different preferences, and a separate ESG template is probably a long way off. Fund groups will need to publish the extent to which funds are meeting the requirements of the objectives and sustainable impact risks.

Mikkel Bates:

As part of the statement you put on the website, that when it comes to sustainable preferences, you’ll direct them to certain parties within the group that are suitably qualified so on. But let me come back to the other part of Jane’s question about “is anyone going to come up with a standardized description of funds?” you’re probably familiar with the MiFID templates that are used at the moment in terms of defining the target market for all funds.

There is now in the latest iteration of the MiFID template, a single question about whether a fund is appropriate for an investor with ESG preferences. Now, everyone knows that that’s going nowhere. You know, one single question when we’ve already talked about the multitude of different values that people can have. There is no doubt that there is work being done on a separate ESG template. And it’ll be a long way down the line.

I think there will be a lot more detail in it, but because there are so many different factors that can come into people’s values and people’s ESG preference, sustainability preference, whatever you want to call them, it’s very difficult to come up with a template that the fund groups can populate objectively that will tell them whether a fund is suitable for people with preferences in this area and that area and the other.

With that, that’s what all groups will need to publish anyway in their pre-contractual documents and their periodic documents and on their website as to the extent to which funds are achieving or meeting the requirements of the taxonomy objectives and the sustainable impact risks.

The UN goals help to apply some kind of framework.

Adam Smith:

I’m just interested in your views. The only bit that I’ve seen makes semi sense at the moment is the utilization of the UN goals, which goals you apply to give some sort of framework or structure. So you can say, this solution is going to provide to these aims, this solution to another. Could you see that coming through? Because that would be massively helpful if it did.

The 17 UN SDGs (sustainable development goals) will have an impact on how funds describe themselves but some of them are very hard to quantify in terms of the achievements of the investments in the fund.

Mikkel Bates:

I think given that the regulators have said that the UN SDGs are one of the two driving forces behind all the regulations, inevitably those 17 SDGs are going to be factors in any sort of filter for the template that comes out and the way funds need to describe themselves. But some of those 17 development goals, I think they’re very difficult to quantify in terms of how they’re incorporated into funds and investment processes and the underlying investments. I haven’t got them in front of me at the moment, but they’re talking about life on land, life, below water, clean air, education, gender equality, and better health for all. I think these are very difficult to quantify in terms of the achievements of the underlying investments in the fund.

Sorting ESG into values aligned, ESG integration and impact can help clients navigate it. Since a lot of people don’t understand the space they’ll be guided by their adviser. We’re looking to understand what the right questions are to ask and how that reflects within the portfolio.

Anastasia Georgiou:

I think that there is, like we said, there’s a lot of different ways of looking at ESG, but you could also try and sort of that into being values aligned, ESG integration, and impact. And if you kept it into those buckets, it would be a lot easier to navigate your clients through those particular preferences. So you can distill it down.

Obviously you are going to get some clients that are already deep into this and want very specific things. But I think, a lot of clients will probably, be guided by you as advisors in terms of the investment, because like we’ve already sort of looked at the fact that, a lot of people don’t really understand the space anyway. So it’s kind of working with the data that’s available so that you could help your clients to sort of understand what the right investment is and direct them into that.

And that’s something we’re actually working on. So we’re working on looking at what are the right questions to ask, and then how do you then display how that reflects within the portfolio? Because that’s the other piece of it. You’ve got to be able to show them, how the investment portfolio meets those needs.

Where is the line between just following what the client wants and taking our own stance that we are trying to get the clients to invest in line with?

Jane Hodges:

I guess it’s me just querying. Because I think that Declan talked about order taking and I’m just in my head as an adviser, are we supposed to be assisting clients who have sustainable values to find the right investments that matches their passions and their values, which I have often heard of people talk about order-taking in that breath. I don’t believe it is, but I do understand that, you’re finding an investment that suits your client’s preferences.

Or is there an anticipation that advice firm has to take its own stance on what it believes is correct in sustainability terms, have statements on their website that says, “I believe passionately, that we should be doing these things and this is how we’ll be doing it”. And then when a client comes along, we’re trying to get them to agree and invest in line with our stance. What, what, where is the line? That’s the bit I’m just trying to get to?

The statement is broadly around how you might assess sustainability. This is just another layer of analysis and advice that you’ll give.

Anastasia Georgiou:

I think the statement is more around your policy. Not really that you’re saying that you’re only going to do it in a certain way. It’s how you might assess, or it can be really, really broad and then it’s down to you but you’re still, at the end of the day, you’re giving advice. That’s what you do and this is just a part of it.

You now will have to ask the question, but then it will be dependent on what those questions are that you ask the client, and at the basics you just can ask them, “do you have ESG preferences? Yes/No.” And highlight Article 8 and 9 funds to them, but that’s not really what you’re going to do as advisers because you’re going to have a conversation. And it’s not just about the ESG piece, it’s about the financial goals and all of the other elements of advice that you’re giving. This is just another layer of analysis and advice that you give.

The regulators are attempting to drive how people invest and push them to be more sustainable in their choices, and that hasn’t been kept secret. But the one person that isn’t regulated is the client, and they can always say no.  

Mikkel Bates:

I think it’s more than a feeling that that’s the way the regulators are going. They said that’s the way, they want to reorient capital flows into sustainable investments. And that is the purpose of their regulations and the disclosures, because that’s the way they feel, they’re looking at the bigger picture. They’re saying, we have the Paris Climate Agreement objective, one and a half degrees by 2050 objective, and the only way we’re going to meet that is by driving investments into sustainable funds and sustainable investments.

And so there’s no secret about it. There’s no sort of devious objectives. They’re very upfront about it, but equally your clients can say, “no, I have no interest in that. I just need to maximize the returns regardless of where it’s invested. I don’t care if it’s in German army bases, prisons, airports, airlines, whatever’s going to give you the best returns”. And they’re entitled to do that because the one person in this chain is not regulated is the client.

ESG is going to become the standard for long-term investing, just like performance and risk.

Anastasia Geogriou:

I can’t remember if it was Ian, or Mik that said this, but ESG investing is just going to become the standard for long-term investing. It’s just going to be another lens with which to look at investments in the same way that you look at performance and risk, I just think it’s going to become part and parcel of assessing investments.

PIMFA is rolling out an education program that is pretty good.

Anastasia Georgiou:

I think one of the initial questions in this section of the conversation was around what advisers can be doing to prepare themselves. I honestly feel like education is the first step, just getting up to speed on this, is really important because once advisers are more confident then they can help to s guide the client. And I’ll just give it a little bit of a plug, which I don’t know if I’m allowed to do, to PIMFA, because they’re actually rolling out an education program that is pretty good.

The language that we’re using to explain sustainable investment at the moment is appalling and confusing. Thank you for explaining what kind of statement we need to publish and how we should be approach ESG with clients.

Jane Hodges:

I just Googled ESG vs SRI to see if I could figure out what the difference was to be able to describe to a client. I read it three times and still wouldn’t be able to explain it. The fact is our language that we’re using on this is appalling at the moment and it’s just that somehow we’ve got to be able to convert it to something that actually, when people hear the word, they know that it means something on the tin. And I think we’re a long way from that.

But thank you for the last conversation. That’s made me feel much more comfortable that no, it’s still going to be part of the client’s choice as to where they invest at the moment. And our job is to try and assist that rather than to force our own preference on them, which is much better. Thank you. Honestly, I just Googled and I read it three times and I still didn’t get the difference.

There’s been no control in the decades up to this point, but hopefully in the near future it will be much more clear.

Mikkel Bates:

I think that’s what I said earlier about it. The problem is the industry has had 30-plus years of ethical, SRI, sustainable investments with no control over how those terms are used. And the IA’s framework for responsible investment that came out at the end last year is the first step in many steps to try and standardize that. So when you look at it, if you look it up and Google it in future, hopefully it will be very clear.

Advisers are relying on second-hand information about the companies that they invest in, so there’s not much the FCA can do against you.

Mikkel Bates:

The only thing I’d say on that last comment really is that advisers, being towards the end of the chain are just reliant on the information you are getting from fund groups who are reliant on the information they’re getting from the companies they invest in. So there’s not much the FCA can do against you guys. If you haven’t got the information from the fund groups, who haven’t got the information from the underlying companies.

It would be great if someone created one master questionnaire everyone could use.

Jane Hodges:

We just talked about the fact that rather than having a thousand different questionnaires and someone comes up with one, who is the group that could, or should come up with one that we can all then start to use and all our managers can come back to. The world needs people, companies to come together to do this is the profiling tools.

Quite a few people are trying to do that mapping, but there won’t be a silver bullet because that’s not commercially sensible.

Elizabeth Stuart:

I can certainly jump in to see there, but just on that point, I was going to say that to you earlier. I think quite a few people are going to put their hands up and do this mapping. If there’s work to be done, there will be providers who will do that for you and try and sell you a license fee for it. Going forward, you’re getting in the weeds with the data, getting more involved and I’m taking a view on it, taking a view, deciding for yourself and the providers that you trust. There won’t be a silver bullet because it’s not commercially sensible for people to make a silver bullet.

Adam Smith:

I was just going to say, it’s not commercial interest that the CFA has just published a discussion paper on it. Which suggested standardization of what would be nice to see the CII or other advisory bodies as well, come out with policy. But so far I’ve seen nothing from any of the advisory bodies.

Elizabeth Stuart:

The people to do it are the regulators. And there are independent bodies. Exactly your point. It’s not for business because that just won’t happen.

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