8 in 10 advisers believe ESG is ‘extremely’ important in portfolio construction

As many as 81% of IFAs believe that environmental, social and governance (ESG) risks are ‘extremely’ important in the construction of client portfolios, according to research by Hymans Robertson Investment Services (HRIS).

It is encouraging to see this appetite; however, advisers must approach responsible investment with care, and develop an understanding of the potential implications on their investments and costs warns HRIS.

The leading financial services consultancy’s research also found that only 6% of advisers thought that ESG considerations should not be made at the expense of returns, which could imply that over 9 in 10 think that they would be willing to give up returns as part of a greater focus on responsible investment. This appears to indicate that they view the future of the environment as being more important as future financial benefit.  Furthermore, only 13% of advisers researched stated that consideration of ESG risks was not a priority, suggesting that for the vast majority it was at the forefront of considerations.  Given the increase focus on this area from consumers, and regulators, it is unsurprising that the majority of advisers have greater focus on responsible investment.

HRIS, a Discretionary Fund Manager, that works with advisers to offer a Tailored Model Portfolio Service, also warns that as IFAs embrace this increased ESG focus, they must ensure that their portfolios construction approach is evidenced and aligned to the rest of their advice approach.

Commenting on the findings and the implications for advisers William Marshall, Chief Investment Officer, Hymans Robertson Investment Services (HRIS) says:

“It is encouraging to see that advisers are embracing the importance of responsible investment.  They are clearly giving a lot of thought to managing ESG risks and as they do this it is important for them to approach responsible investment both carefully and sensibly.  Key to this will be taking time to look at past learnings from other sectors, such as institutional pensions, to understand how they are seeking to manage and benefit from ESG related risks and opportunities.

“Responsible investment is a journey being undertaken by investors and advisers and their appetite will change as regulation, and the products offered, evolve.  Transparency and reporting will be the important in the approach taken to managing ESG risks as this evolution develops. It is clear from our research that the vast majority of advisers are either seeing demand, or expecting increased demand, from clients for ESG risk to be incorporated in their portfolios.  As this grows advisers must retain a robust approach and ensure they take care to consider all elements as they meet that need in their clients’ portfolio construction.”

Explaining about the approach advisers should take when considering responsible investment in portfolio construction, William Marshall continues:

“Responsible investment must be considered across all aspects of portfolio construction.  Adjusting the strategic regional equity allocation, for instance, has the potential to reduce carbon exposure as much as buying a more expensive low carbon fund.  This is just an example and is not to say the former is better than the latter, but shows that investors have various potential options to achieve their objectives and it is important to consider them all options to identify the most appropriate.

“For advisers using model portfolios, it is important that the models’ approach to responsible investment is tailored so that it is aligned to the advice approach being given, especially the attitude to risk questionnaires.  The models must be transparent and it is vital that the responsible investment approach is clearly communicated to clients.

“In terms of sustainable focused stocks, there will be some areas that are overcrowded or over-priced; but there will also be worthy future winners, which may be perceived as a bit expensive today.  We still don’t know how far through the re-pricing of companies to take account of the transition to a lower carbon world we are.  There will be, as ever in investing, the potential for sound long-term investments that investors may be comfortable paying a bit more for today, in the expectation of still achieving long-term sustainable returns.”

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