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ESG becoming essential to advised investment propositions

16 October 2020

Two recently published research documents point to ESG becoming an essential element of adviser investment offerings.

Incorporating environmental, social and governance factors into an investment approach does not harm returns, a new paper from Royal London and EY has shown.

Responsible Investing: New evidence, new energy reviewed more than 300 academic and published papers and found either neutral or positive evidence that companies that had pursued substantial environmental and social policies since the 1990s perform better than other companies on return on equity and return on assets as well as stock market performance over time.

In addition, companies with higher ESG ratings exhibited lower share price volatility than those that don’t.

Lorna Blyth, head of investment solutions, Royal London, said: “This paper not only makes a strong case for the benefits responsible investment can deliver, it also makes a commercial and compliance case for financial advisers and other key players in the industry to embrace greater sustainability.

According to Blyth, it is “no longer feasible” for advisers or asset managers to treat responsible investing as an optional extra and those that do “risk being left behind.”

Gareth Mee, sustainable finance consulting leader and partner, EY, said responsible investing has become widely recognised across the industry as the right thing to do, ethically and financially.

Mee added: “We see time and time again that companies with strong ethics and good governance are the ones that do well long term, through tough economic times and in good years. As ESG becomes more embedded within financial services, responsible investing will act as a cornerstone to activity, strengthening and protecting capital markets.”

ESG as part if advisers core investment offering

The findings come as financial consultancy group NextWealth urged advisers to integrate ESG investing into their firm’s core investment proposition.

While 78% of advisers include a question about ESG, ethical, impact or sustainable investing in the KYC process, this largely falls under the ‘ethical’ heading.

On average, 12% of client assets are in ESG, ethical, impact or sustainable funds or portfolios, up from 7% last year, which NextWealth says marks the “end of the early adopter phase.”

According to NextWealth, the next big wave of adoption will be driven by strengthening regulatory requirements on listed companies and asset managers to report against ESG criteria and on advisers to consider ESG criteria as part of suitability.

The report also found that while retail investors continue to prioritise investment returns over ‘doing good’ there is a desire to ‘do no harm’ with investments, and integration into the core investment proposition will satisfy the needs of most investors.

Meanwhile, over two fifths (61%) of advisers say they will rely most heavily on research and ratings agencies for help in developing an ESG, ethical, impact or sustainable investment proposition.

Heather Hopkins, managing director, NextWealth, says: “We think ESG integration needs to happen at the adviser proposition level first. Most clients will be happy with an ESG-integrated core investment proposition and won’t need expensive bespoke solutions.

“In the needs assessment, the challenge for advisers is to integrate a conversation about financial and non-financial goals without falling down rabbit holes that will lead to unnecessarily expensive bespoke solutions.”

Clive Waller, director, NextWealth, added: “Data is the big issue. Advisers will demand to know how fund managers research the companies they invest in; how many do they research in detail; whether or not they outsource to data providers such as MSCI or Sustainalytics and how they use the data.”

The full report from NextWealth can be downloaded here.

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