By Jim Henning, Head of Investment Services
As we started 2020, it wasn’t long before further disturbing news about climate change grabbed the headlines – the wildfires raging in Australia; the last 10 years in the UK being the second hottest in the past 100 years; and Mark Carney’s – the outgoing Governor of the Bank of England – stark warning around irreversible global warming unless firms shift their priorities soon.
Given the ever increasing and concerning news flow, has there been evidence of any sea change in investor attitudes and behaviours? In particular, we wanted to find out what Dynamic Planner users and their clients are thinking when it comes to considering sustainable investment strategies and how we could potentially help. During our Training Academies events over Q4 2019, we asked delegates the following three questions as part of the general feedback process:
“My clients are interested in sustainable / ethical investments?”
A third of respondents agreed with this statement, but still just over half expressed no opinion, suggesting a lot of work is still needed.
“I discuss sustainable / ethical investment options with my clients during annual reviews?”
Over half of respondents said they already were having such discussions.
“I would like more support from Dynamic Planner concerning sustainable / ethical investments?”
Almost half of respondents are looking for more support.
It’s hardly surprising that there is a need to demystify the confusing range of solutions available. When looking across the Investment Association (IA) sectors, the range of fund descriptions include, ‘Ethical, Responsible, Sustainable, SRI, Positive Change /Impact /Future, Environmental / Ecology / Green and Clean Energy’. That taxonomy only applies to a small subset of 122 funds out of a total of 2,654 across all IA sectors, accounting for less than 5% of their overall assets under management.
When viewed across their respective asset class characteristics, as expected, equity-based funds constitute the widest choice, but the growing popularity of multi asset funds has also permeated into this specialist segment, given the growing issuance of green bonds, now accounting for 20% of those available.
The IA’s plan to introduce a clearer set of definitions for what is meant by Environmental, Social and Governance (ESG) factor investing is going to be a very important advance in helping advisers meet the suitability requirement. In addition, extremely thorough research into the policies of these types of specialist funds is freely available online.
MiFID II’s directives on ESG will also come into force at some stage in 2020 and this most likely will also be adopted in the UK, even post-Brexit. These rules will require that any final recommendations to the client should reflect both the financial objectives and, where relevant, the ESG preferences of that client, which should be established via questions in the initial suitability assessment. There is also an obligation on asset managers to provide more disclosure on how ESG factors are reflected in their financial product offerings.
The financial services industry, with more than $120 trillion of assets under stewardship, simply cannot ignore the ever-increasing emergency of climate change and now is the time to innovate. This will be driven by growing demand from investors for greater clarity on how companies they invest in behave and make a difference, with systems in place to measure this consistently and clearly, without spin. With the full support of the regulators behind this, increased disclosure in some form is inevitable. However, this shouldn’t be perceived as yet another regulatory burden being imposed on already stretched asset managers and advisory firms.
In a recent Dynamic Planner survey, we asked advisers:
“If there was more informed research into how underlying companies (and the funds in which they are held) impact the wider society and environment, do you think this will encourage investors to select more responsibly run funds?”
Encouragingly, 86% of respondents agreed with this statement. Two thirds also agreed with the question below:
“Do you think your clients would be interested in knowing how their conventional investment funds can be compared across a range of ESG issues?”
If such research data can be delivered in an engaging and measurable way, across whole-of-market fund solutions, then this suggests it can help accelerate the adoption of sustainable investment alternatives as the essential norm rather than the exception.
Enabling more informed investor choice is a very powerful force and will be essential in developing a positive plan of action for firms to meet the net zero global carbon emissions target by 2050 and slow down the alarming trajectory of global warming forecasts.
From a Dynamic Planner perspective, we see sustainability as both a natural and vitally important extension of our market-leading investment suitability proposition. We know that our users are asking for support in this area and we look forward to sharing our plans with you over the course of 2020 and beyond.
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