The challenge for advisers is finding products that are most closely aligned with their clients’ ESG or ethical beliefs. It is rare to have clients with exactly the same beliefs or principles. This blog will suggest key steps and identify freely available resources to match genuine ESG products with investor demands.
What should an ESG product look like?
There are two key features that all ESG style funds should have:
1. Negative screens or tilts – companies/industries that are excluded or held at underweight positions relative to the market
2. Positive tilts – companies/industries that investors want overweight exposure to relative to the market
Negative tilts
Typical negative screens include fossil fuels, alcohol, and gambling. These industries can result in some form of harm, for example the burning of fossil fuels results in environmental (E) impact that is contributing to climate change. Similarly, alcohol and gambling can have negative community and social (S) impacts due to the potential damage to the health and wellbeing of individuals.
Positive tilts
Positive tilts in ESG products will also often use environmental or social metrics to identify stocks to include in a portfolio and take an “overweight” position. Examples include renewable energy, education, or healthcare. Another approach is to score companies across a wide range of ESG metrics – and then overweight stocks that have the highest aggregate ESG scores.
Responsible Investment Association of Australasia (RIAA)
Help is at hand for advisers overwhelmed by the deluge of ESG-related marketing from investment providers. RIAA has an invaluable, and independent, source of guides that are all available on their website. Most importantly, they provide Product Certification for ESG products (found under the RI Certification section of their website) and a search function that allows advisers to identify what certified products match their clients’ ESG beliefs. If a product has the RIAA certification, it should provide advisers with comfort that the product has genuine ESG credentials.
A 3-step check for advisers:
When choosing the right ESG product for clients, ask yourself:
1. Do the product’s negative screens match my clients’ beliefs?
2. Are the positive tilts also consistent with the ESG themes that are important to them?
3. Is the product certified by RIAA?
How ‘green’ is your client?
As highlighted, investor demands around ESG criteria are often unique to them. Some clients are likely to want very hard exclusions and have nil exposure to fossil fuels and mining for example. Such a client might be evaluated as being “dark green”, i.e. their ESG beliefs are very hard and take precedence over missed investment opportunities.
James Harwood, senior portfolio manager, Russell Investments
Want more content on advice strategy? Register now for ifa’s Business Strategy Day 2021.
