FOR UK FINANCIAL ADVISERS
Why Financial Advisers should put responsible investment at the heart of portfolios
16 Nov 2020
COVID-19 continues to dominate both headlines and markets but it’s vital that Financial Advisers don’t lose sight of other, equally important, trends. Responsible investment has not moved to the backburner during this global pandemic – in fact, quite the opposite.
Responsible investment is a huge umbrella term, so let’s start by breaking down the key themes – why is it so important?
Impact on risk and return
This graph shows the impact of Dieselgate on the Volkswagen share price.
Volkswagen share price (2003 – 2020) (click the image to enlarge)
Clearly this is an extreme example. But while they do say you can’t prove a negative, I think this shows the stark impact that poor governance can have on an organisation and its value. The emissions scandal cost VW around £30bn, and the damage to the brand was incalculable. These things matter to consumers and so, obviously, they matter to investors. But the flip side is perhaps more important: organisations that get it right can reap the rewards in terms of consumer confidence and therefore value.
For many, responsible investment is synonymous with regulation. And yes, the evidence suggests that this is true. The “PRI” – the UN backed principles of responsible investment, published the chart below. It shows the dramatic rise in environmental, social and governance (“ESG”) related policies being applied globally and looks like it is only going one way.
(Click the image to enlarge)
This Adviser community has always had to deal with enormous amounts of regulation, but this increased focus on investors’ approach to managing ESG risk potentially presents an additional burden, e.g. the upcoming Sustainability Financial Disclosures Regulations, looks to place greater requirements on both asset managers and advisers.
Whether it’s refusing a plastic bag or planning an electric car, society is changing. Investors are people; the things that are important in their daily lives stay important when it comes to their portfolio.
At the end of the day, clients want returns. There’s a real belief that organisations doing the right things will produce the right returns over the long term, which drives client demand. We see this right across sectors – don’t fall into the trap of believing only millennials prioritise ESG.
Building a responsibly invested portfolio
In my experience, good responsible investment is a journey. What ‘good’ looks like changes over time, due to regulatory change, client interests, and product availability etc. It’s not a quick fix – the right portfolio will take time to build and will need review and adjustment.
It is important we commit to the journey. Look under the bonnet, get to grips with the jargon, avoid “greenwashing” and check the details.
Ultimately, getting to grips with the detail will be time well spent. Managing ESG related risks, should increase the likelihood of predictable, sustained returns over the long term. And that’s got to be good for clients.
As always, if you’d like to discuss any of the issues in this blog, don’t hesitate to get in touch. You may also want to catch up with our recent webinar on responsible investment where I discuss these issues in more detail.