The idea that responsible investing (RI) is integral to fiduciary duty has taken hold globally and has important implications for financial advisers, an expert has said.
Zenith Investment Partners head of responsible investment and sustainability, Dugald Higgins, believes that the investment landscape is undergoing a permanent change, underpinned by the intersection of social license and regulatory actions.
“Regulatory change from governments, industry bodies and global organisations is hard to unwind once it is established, and we are well down that path. But a lack of agreement on what responsible investing is, brings its own challenges,” said Mr Higgins.
“What is good or green in RI is very much in the eye of the beholder,” Mr Higgins said.
“The challenge, therefore, is how do advisers identify a client’s RI preferences and how can they action them in a systematic way?”
Mr Higgins believes that as the development of global sustainability disclosure standards, fund labelling, and mitigating greenwashing continue to gather pace, markets are moving to “meaningfully emphasise and even change advice requirements regarding RI considerations”.
“The continued development of standards in Europe, the UK and the US may foreshadow what the future ultimately looks like in other countries like Australia. For example, market participants in Europe are already required to disclose how they account for sustainability risks in decisions and products, with funds required to be classified based on the degree to which ESG and sustainability is a consideration,” Mr Higgins explained.
“ASIC has acknowledged that global harmonisation is desirable while taking into account local conditions. Australian advisers should actively consider the implications of a similar regulatory framework for their businesses,” he continued.
As such, he said that advisers have a vital role to play in helping clients understand what ‘good’ outcomes look like.
“What’s good looks different based on different asset classes and investment approaches. Investors need to understand how far they are prepared to go to pursue RI preferences and what outcomes they are prepared to accept.
“There is no utopia, only compromises, as positive goals often come at a cost — including the understanding that to get to ‘green’, you might have to start by getting dirty in order to transition.”
Ultimately, he noted that advisers play a critical role in helping clients stay the course.
“Like all investment concepts, RI strategies will exhibit periods where performance is challenged and it will be important for advisers to help clients understand what expected outcomes look like and why,” Mr Higgins said.
“The concept of ‘adviser alpha’ doesn’t just apply to the more traditional concepts of risk and return; it is also going to play a pivotal role in facilitating responsible investment preferences as well.”
