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How can advisers raise their game to be agents of change for sustainable investing? How ready are they for this task? Recent research from Pru highlights not only the issues involved but also what is needed to support the delivery of change.
As the world powers up for November’s UN Climate Change Conference 2021 (COP26), the global media lens will be firmly fixed on matters of sustainability.
At the conference, countries are being asked to come forward with ambitious 2030 emissions reductions targets that align with reaching net zero by the middle of the century.
To deliver on these stretching targets, countries will need to:
- accelerate the phase-out of coal
- curtail deforestation
- speed up the switch to electric vehicles
- encourage investment in renewable
What is COP26 likely to mean for the advice and investment professional?
We know that advisers are playing an increasingly important role in influencing clients’ attitudes towards environment, social and governance (ESG) focused investing and helping them to find appropriate solutions which match their sustainable goals and investment/risk objectives.
But how ready are advisers for this task? What do they most need today to support the delivery of change? And where do they feel their clients’ ‘heads and hearts’ are in relation to sustainable investing?
In June 2021, Pru commissioned specialist research to help understand this through the adviser’s lens, the findings from which formed the basis of Pru’s influential The Power of Advice report.
So what did the report uncover? There were a number of areas to identify:
- Appetite for sustainable investment has grown during pandemic
Covid-19 has undoubtedly heavily influenced investors’ agendas, driving a re-evaluation of the environment and ‘what matters most’. Data from Pru’s report, Family Wealth Unlocked, showed how for one in two advised investors (51%), the pandemic has fuelled their appetite for sustainable investments. 45% went further still, saying that they now only want to invest in ethical companies and funds. In fact, only 11% of the sample (across all generations) said they didn’t intend to invest in ESG investments over the next five years.
Furthermore, 39% of advised clients said they expected to increase the amount they invested in socially responsible investments, 31% maintaining their current level and just 5% decreasing their spend.
- How do clients view ESG/sustainable investing?
A key part of understanding how advisers can best support their clients with any ESG investment strategy, is to look at client sentiment. Pru’s research has revealed that clients are expressing an active interest in sustainable investing, coupled with the need for help in where to start. This was the most commonly expressed client sentiment. 46% of advisers said their clients “would like to consider ESG/sustainable investing more, but were unsure how to”. A clear sign of the central role advisers need to play in educating their clients ahead of integrating these funds into portfolios.
- How can advisers best respond to clients’ ESG demands?
With advisers at the heart of client conversations about sustainable investing, what do they believe providers, the wider industry and advisers themselves most need to do to increase consideration by their clients?
In their survey, Pru asked this as an open question and the following themes recurred frequently as responses: –
“Make sustainable investing integral to adviser’s risk profiling questionnaire and factfinds”
“More quantified information so clients can see the positive ESG impact their investment decisions are having”
“Advisers increasing promotion to clients”
“A wider range of ESG products comparable directly to non-ESG ones”
“More education and support from providers”
- Over half of advisers are discussing sustainability with clients
While educating clients on the value of sustainable investing is a primary task for advisers as agents of change, Pru’s research suggests more could be done to initiate the conversation. The research reveals that only 46% of advised clients said their financial advisers had ever raised the topic of ESG investments with them.
While this figure is surprising and disappointing in equal measure, there are several potential reasons behind this.
Many advisers are still looking to improve their awareness and understanding of sustainable investing: of the different fund types (eg screened, ESG, climate), their performance and their ESG outcomes. The industry still has significant work to do, to help clients understand the key components of ESG-focused investing.
For others, with ESG increasingly baked into more and more funds as standard, there is scant need to express fund recommendations as sustainable funds.
- What support do advisers need?
With some advisers still to fully embrace sustainable investing, and a succession of new ESG funds coming to market, for advisers to stay fully in the know, asset managers need to do more to “educate, illustrate and inform”. But in what areas of focus would advisers most value help?
The research shows two clear winners. 59% of advisers said they most needed “communication around the benefits of sustainable investing for clients”, including materials that demonstrate the wider sustainable outcomes unique to the sector. Also at 59%, advisers are seeking increased clarity of ratings relating to ESG factors on funds, to facilitate direct comparisons with both sustainable funds and the wider market. 43% of advisers expressed a need for a sustainable investing/funds toolkit that they could use with their end clients, containing videos, sales aids and guides.
Catriona McInally, ESG Investment Expert at Pru UK, said: “Our Power of Advice research really shines a light on how advisers can drive sustainable investing. Understanding the increased appetite among clients, throughout the pandemic, and analysing how clients view ESG and sustainable investing, through our research puts us in the best position to develop further support for advisers. It means we can ensure advisers are in a strong position to respond to their clients’ ESG demands. With over half of advisers already discussing sustainability with their clients, there is still room to grow awareness further and for them to become agents of positive change.”
Looking forward, it is clear that advisers and product providers will need to work together to ensure that matters of sustainability take centre stage and can be done in the most efficient and effective way. Putting clients’ needs first is always the driver. Pru’s report shows that sustainable investing is becoming a core objective for increasing numbers of clients. COP26 is only likely to further that requirement.
Source for research. Power of advice report: Advisers as agents of change for sustainable investing 2021. Click here to view the report