Ride the ESG wave to stronger client relationships

When it comes to building wealth, the end has historically justified the means. However, after years of climate-linked disasters, Australian investors have a growing awareness of the impact of their investments. Many people are now just as concerned with the way they reach their financial goals, as the goals themselves.

The rise of ESG – setting new rules of engagement

We are now starting to see a fundamental shift in the way clients view their investments, which is creating opportunities for advisers to connect with clients in a deeper, more meaningful way.

A growing number of clients are taking a keen interest in how their investments impact the world around them, and more specifically, how their investments relate to our physical environment. After years of devastating bushfires and floods, many Australians are eager to leave a positive impact on the environment in any way they can, and this includes how they invest.

According to KPMG and RIAA’s 2021 Responsible Investment Benchmark Report ¹, the Australian responsible investment market increased to $1.2 trillion in 2020, up from $983 billion in 2019. The numbers are yet to be released for 2021, but even anecdotally it is clear that the importance of sustainable and responsible investment continues to grow among investors.

From an investment perspective, environmental, social and governance (ESG) factors blend emotion and rational events, and act as a trigger to investment decision making. To that end, ESG factors can have a significant influence on the adviser-client relationship, which advisers can use to inspire clients to act and hold their attention.

Never waste a crisis

Advisers have long considered their clients’ values and preferences in the investment decision making process.

But in all my time in the industry, never have I witnessed such a pronounced interest from clients in taking control of the composition of their portfolio to ensure it aligns with their ESG values.

Clients do not typically walk into their adviser’s practice and demand one product over another or make specific tactical requests. But on this issue, they are motivated to act decisively.

Advisers now have an opportunity to engage at a deeper level with their clients – values-based engagement with a broad cross-section of their client book.

To some in the industry it remains unclear how to best harness this heightened engagement and deliver better client outcomes.

Clients are requesting portfolio allocations that reflect their values, but they also want visibility over their investments, and the ability to connect their actions with a positive impact.

Provide visibility of a positive impact

Investment management firms are already designing solutions to take advantage of clients’ increased engagement on sustainability issues, building products which help advisers to not only allocate according to their clients’ ESG values, but to demonstrate how they do so in real-time.

Sustainable managed portfolios are one solution brought to market in recent years which provide financial advice practices with portfolios targeting lower carbon emissions and enhanced ESG outcomes within the efficient structure of a managed account.

These sustainable managed portfolios are often dynamic, multi-asset solutions which can service a range of risk appetites. Importantly, some sustainable managed portfolios employ a direct equity component to meet sustainable investors’ need for transparency and flexibility by tailoring the shares held according to ESG objectives and exclusions.

This allows clients to see, understand and potentially adapt their holdings through the managed account structure, and increases engagement between the adviser and their client.

Whatever products they choose to use, advisers who can catch the ESG wave and engage with their clients equally on issues of sustainability will be those who achieve the best possible outcome for their practice, and their client.