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Making the case for ESG portfolios

For financial professionals only

At a recent Professional Paraplanner Technical Insights Workshop, we asked: What proportion of your investment recommendation reports are for ESG solutions?

From a group of several dozen planners, this was the result.

Less than 1 report in 10                 13%

Up to 1 report in 4                            26%

Up to half my reports                      48%

Over half my reports                       13%

It confirms that interest in ESG investing has become mainstream, but there are still challenges, some of them we believe are being made worse by the current investment climate.

A turn in markets

This year investors have had to come to terms with rising interest rates, a dislocated global supply chain, a European war, energy shocks, and sharp increases in inflation – leaving to one side domestic political turbulence.

These factors have knocked the gloss off ‘growth’ investments, and given a relative lift to ‘value’, or in crude terms, to more cash generative companies. Such businesses include banks, oil companies, arms manufacturers and tobacco companies.

It’s worth stopping for a minute before advising on a decision to invest in all these areas, especially into arms manufacturing, and to ask if we see investment as a longer term prospect, especially for intergenerational wealth.

Instead, should we be looking at whether long term government policy framework at home and abroad – from tax incentives, subsidies and capital projects – will be more in favour of sustainability than cash generation in a time of shocks?

Getting a good fit

Planners explained their challenges around creating advisory solutions for individuals. Making sense of fund data in research based on a client’s views on sustainability and producing a recommendation is no easy feat. Often it seems to involve expensive analytical tools.

For us as an investment manager, this is a crucial argument for outsourcing fund research to a specialist, to be able to ask all the questions possible, with no commitment to buy or retain a range of expensive tools.

As a professional DFM we also believe that our rigorous fund due diligence adds real value to our asset allocation analysis. And given the subjectivity of ESG investing, you will need some flexibility with mandates. So, our solution has 4 profiles. Our downloadable decision tree can help you guide a client to the right one.

A point about client preferences

Studying client preferences around our 4 Ethical portfolio profiles through our Vantage platform data tool, we can see that nearly two thirds of our investors in these solutions are women.

Wider surveys also show that ESG is more important to women than men (1). Planners have quickly picked up on this and its relevance in producing suitable recommendations for individuals within a couple. The topic can be a fruitful talking point in reviews, especially when the conversation turns to providing for later generations with the realistic backdrop that one partner will outlive the other.

Realism about investment returns

The impressive returns from ESG investing over recent years (2) have not been repeated in 2022. But we shouldn’t see this as a final judgement on the approach as a whole.

Businesses that pass ESG screening are often seen as leaders in their fields and have a future looking perspective. In a market hungry for returns and hungry for yield, oil and gas and tobacco shares have their appeal right now. But, for many, that’s not the main factor in selecting how to invest.

The case we make to planners researching investment solutions is that very detailed fund research and well constructed portfolios offer long term an opportunity to stay ahead of change. We can help with saving time spent on doing this work and the benefit of having a professional on your side as a partner to explain how and why  our solutions are designed to deliver the best outcomes that can sensibly be achieved for your clients.

If you’d like to hear about how we can help you, get in touch.

The value of an investment and the income from it can go down as well as up, and your clients could get back less than originally invested. There is no guarantee the solutions or funds will meet their objectives. Past performance is not a reliable indicator of future returns.

(1) https://www.theaic.co.uk/aic/news/press-releases/how-much-does-esg-really-matter-to-investors

(2) https://www.moneymarketing.co.uk/opinion/interest-in-esg-shows-no-signs-of-stopping/#:~:text=Over%20five%20years%20to%2031,%2C%20so%20far%2C%20so%20good