Jessica Streeter, member of the PFS Paraplanning Panel, considers the practical implications of the rise in ESG investing on the everyday role of paraplanners.
In recent years, sustainable investing has transitioned from a niche approach to a mainstream consideration in the finance world. Investors are increasingly drawn to opportunities that align with their values, and this shift is profoundly influencing paraplanning, and their ability to assist advisers in constructing and managing a client’s financial plans. Therefore, understanding the importance and role of sustainable investing is imperative.
1. Aligning values with investments
Sustainable investing, often referred to as socially responsible investing (SRI) or environmental, social and governance (ESG) investing, came into prominence over twenty years ago and often refers to eliminating investment in companies that do not meet certain social or moral factors. Paraplanners and advisers now find themselves delving deeper into clients’ values, beliefs, and ethical considerations to align investment portfolios with those core principles. This shift requires a more comprehensive approach to financial planning, integrating personal values into the traditional performance, number-driven process.
Therefore, it is important that the ethical and sustainable considerations are detailed in a fact-find/KYC and any annual reviews. You could also look into suggesting the use of sustainable investment questionnaires that can help in assisting these discussions within your business/company.
2. Risk and return.
Historically, there has been a misconception that sustainable investing may compromise returns, and the performance since 2022 for sustainable investments has been challenging in the backdrop of the global and political landscape and the ‘Magnificent Seven’. However, an increasing body of evidence suggests that companies with strong ESG practices can outperform their counterparts over the long term, with investment managers now aligning their fees with their regular investment portfolios. Paraplanners must stay abreast of the latest research and trends in sustainable investing, in particular, how ESG factors can impact financial performance and risk management, and the issues surrounding ‘greenwashing’ – which is a big risk to any business.
3. Due diligence
Paraplanners face the challenge of conducting thorough due diligence on sustainable funds. This goes beyond traditional financial analysis, necessitating an in-depth assessment of a fund’s environmental, impact, social responsibility initiatives and governance practices. Integrating these considerations into the due diligence process is essential for researching and/or constructing portfolios that not only align with the client’s values but also meet their financial goals. Investment Research providers now supply ESG ratings which consider the company’s exposure to various issues around ESG factors, the risks related to those factors, and how these risks are managed. You can also filter out investments that have exposure to weapons, tobacco, alcohol, gas, religious issues etc.
Each investment manager approaches sustainable investing in their own unique way, where they lie on the green spectrum, how they tailor their proposition to specific client needs, even down to the ongoing communication of their actions, price, and performance.
Therefore, it is important to get under the bonnet of the investment options. What type of businesses lie beneath? If a client wants no fossil fuels, are they able to fully achieve this? It is about using the tools available and being diligent to help avoid unsuitability and disappointment. Balancing trade-offs and priorities. Sustainable investing is not black and white.
4. Regulatory landscape and compliance
The growing interest in sustainable investing has prompted regulatory bodies to develop guidelines and standards for ESG disclosure, I.e., the EU Sustainable Finance Disclosure Regulation (SFDR) and the UK’s Sustainability Disclosure Requirements (SDR) and the changing definitions of what constitutes ‘greenwashing.’ The sustainable investment regulatory landscape is difficult to navigate – with the goalposts constantly changing. Staying informed of these changing regulations and understanding how they impact sustainable investment strategies is paramount for providing sound financial advice within legal frameworks.
In addition, staying up to date on the various approaches to sustainable investing is also important, such as negative and positive screening and impact investing (the greenest in terms of investment criteria).
In suitability letters, it is about simple, client-friendly language, checking risk warnings to ensure they are also appropriate for sustainable investing.
5. Integration of Technology
The rise of sustainable investing has also seen a development in financial technology tools tailored to assess and monitor ESG factors, as mentioned in Point 3. These tools can help streamline the analysis of sustainable investment options as well as be able to look at performance against ESG benchmarks. Leveraging technology ensures that we, as Paraplanners, can efficiently incorporate sustainable considerations into our research.
In conclusion, the impact of sustainable investing is profound and multi-faceted. From aligning values with investments to navigating regulatory landscapes and integrating technology. Paraplanners are at the forefront of this shift, in assisting advisers to deliver on providing and/or constructing sustainable investment portfolios. Embracing these changes, staying informed and adapting strategies to meet the needs of clients is key to providing comprehensive, value-driven advice for years to come.
