ESG has been the investment acronym on everybody’s lips for the past few years.
While many thought it was a movement going nowhere, it has quickly and steadily gained traction among both clients and investment professionals; with environmental-, social- and/or governance-themed product introduced every other day.
And, unsurprisingly, it has reached the financial advice sphere as well.
Many clients, regardless of age or profession, are becoming aware of the impact their money can have, and are questioning their planner’s knowledge and actions when it comes to their investments.
One thing is sure, ESG is here to stay and customers are demanding their adviser aligns financial planning with positive actions for the planet, society and culture.
This is something David Macdonald, founder of FCA-authorised advisory firm The Path, took fully on board when he set up his business.
Macdonald was working with St James’s Place up until two years ago, when he sold his business to another SJP partner.
“Something was nagging at me with my day-to-day working and I wasn’t quite sure to what it was,” he told International Adviser.
“I thought that it was work itself that I wasn’t enjoying. But it occurred to me that the reason I wasn’t feeling great about the business was the underlying investments, there were a lot into the extraction industries and unsustainable businesses.
“The more I looked into it, the more I realised there must be a way for potential customers who would like to be a bit more constructive with their money.
“So, I decided that the best I could do with my time was to try and influence change to try to get the investment public into investing in something more sustainable,” he said.
Freshen up the sector
At the beginning of 2020, The Path announced a recruitment drive, looking for financial advisers “to help tackle the climate emergency”.
“What I’m trying to do is build a reasonable, substantial business,” Macdonald said. “The idea, really, is to build an advice community to meet the demands of the investment community.”
And he is looking to hire people across the board, after witnessing a lot of frustration among advisers.
According to Macdonald, this is due to the strict ties professionals are bound to when offering ESG products.
“They are constrained to an extremely small percentage of investments that can go into ethical and impact funds because the perception is that they’re higher risk, they’re less diversified and that there is a trade off in performance,” he added.
Obstacles are still present
The biggest ESG problem, however, is the lack of a central and standardised vocabulary as to what it actually is or means.
The greater issue, according to Macdonald, is not just nomenclature, but how to measure the impact that such investments have.
“I think definitions around ESG are getting a bit tighter, and I think we would tend to apply the stricter definitions.
“So, when it comes to environment in particular, for example, we would draw the line at any extraction industry, we would have exclusion criteria [and] we would not adopt the ‘influence through shareholder pressure’ approach.
“Impact is a more difficult one because it aims to achieve a functional portfolio; it wouldn’t really be possible to align [portfolios] 100% with the United Nation’s sustainability goals because they are not often investible.
“We can achieve a relatively high degree of correlation, around 70%,” he added.
Not just millennials
Since setting up The Path, Macdonald said the firm has received a very high number of enquiries.
Unsurprisingly, there were many young people interested, but also a few less obvious sectors.
“There is a strong level of enquiries, in particular actually from the medical community, a lot of doctors, also people who are employed to work outside and closer to nature.
“The demographic of enquiries seems to be quite heavily towards the younger generation, but there’s an entire community of people in their 60s and 70s who have got pension funds or accumulated savings who seem to be very passionate and enthusiastic about the concept.
“So, it’s not just the younger enquiries, it’s across the board,” he said.
Take interest forward
But what can financial planners do if they want to expand into the world of ‘eco-advice’?
“Education would be the first thing to do,” Macdonald said.
There are many resources available, with the CFA Institute rolling out an ESG certificate at the end of last year.
Macdonald continued: “With increasingly large numbers of fund managers who are offering funds which are leading with ESG or impact, advisers could learn from them how they can fit it in the investment management approach.
“And there are some specialist analysts that advisers can go to for portfolio construction.
“I would encourage advisers to review their investment management approach, first and foremost, to see where ESG and impact investing could feature,” he added.