Most clients are aware of the ‘E’ of ESG – climate change, our responsibility towards the environment and the ‘Attenborough effect’ when it comes to plastics. But most haven’t really thought about it in terms of their pensions or investments – most clients don’t look beyond name of the fund.
The ‘S’ is new to them, but they’re often surprised that ‘G’ is a new thing – they assume that governance has already taken place.
So ESG offers a great opportunity to explain that their portfolio might be able to reflect and support all three areas of ESG in a positive way.
How I engage clients with ESG
MIFID II says that you have to have ESG considered within the fact-finding process, but it doesn’t say how you do that. If you ask clients if they’d like to invest in companies and/or funds that consider the environment, sustainability and corporate governance, then they’re unlikely to say no, but do they really know what this question means?
So the questions I use are designed to help clients to realise that they do have ESG concerns even if they’ve never thought about it.
For example, I would say: “How important is it to you that your investment funds avoid animal testing for cosmetic purposes?” People don’t realise is that many drugs testing companies have to use this because it’s often a regulatory requirement.
Another one might be: “How important is it to you to avoid investments in pornography or gambling?” Most portfolios will exclude those anyway, but it covers a wide range of ESG concerns.
“Are you interested investing in a way that supports companies with good equality, diversity or human rights records?” Most people say actually, yes, if it’s possible to do this then I would.
The challenges
As we know, as an investment concept, ESG faces challenges.
The classic example is the fashion brand Boo Hoo who scored well on ESG standards themselves, but in 2020 it was accused of modern slavery when it was revealed that one step down the supply chain, it was paying garment workers in its Leicester factories well below the minimum wage.
Likewise, eating avocados were seen as being a healthy and ‘sustainable’ choice for people trying to reduce their meat consumption, but on a deeper level, it’s been revealed they have a significant carbon footprint. A Mexican avocado would have to travel 5555 miles to reach the UK. And it’s picked before it’s ripe and shipped in temperature-controlled storage, which is energy intensive.
A final example would be lab-grown diamonds, which has been touted as the next big thing. These are diamonds manufactured in a lab, which naturally you’d think would be much better for the environment than digging them out of the ground in Africa, except there not!
The huge amount of power needed to create a diamond can lead to a significant output in carbon pollution. The 2019 Trucost report found that, on average, greenhouse gas emissions are three times greater for lab-grown diamonds than their mined counterparts. In addition, they’re commonly produced in countries such as China, Singapore and the US, places that lean heavily upon fossil fuels for energy.
It’s a complex topic and I try not to get too drawn into the nitty gritty of the argument because madness could result! My point of view is that it’s better to make a start and do something and as this evolves, things will get better.
The main question clients ask is will my portfolio suffer in any way, and the way I explain that is to overlay two performance charts through FE Analytics. I can show them they have now, vs the proposed ESG portfolio, I can also add in charges. This enables them to see that they’re not losing anything on performance, which is a real clincher.
One thing I do know is that clients get more enthusiastic talking about ESG issues than their investments! Everyone likes David Attenborough, but I need to remind them I’m a planner; placing ESG comfortably within financial planning is where real traction needs to be made.