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Embrace ESG or be prepared for loss

Times are changing for financial advisers. Russia, climate change, koalas, Indigenous cultural heritage, sexual harassment in the workplace – none of these are issues which financial advisers would have thought they’d ever be discussing with their clients a few years back.

Today, the finance sector at large, and financial advisers specifically, are increasingly needing to be prepared to understand how these kinds of issues – environmental, social, governance (ESG) and ethical issues – are being considered in your advice as well as the investments you’re making on behalf of your clients.

But before you tune out, there’s several good reasons to embrace this shift.

Around 64 per cent of Australians surveyed at the start of 2022 said they expect their financial advisers to know about responsible and ethical investment options, and 50 per cent expect that their financial adviser considers their values when devising investment options.

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Some advisers I talk with tell me that they don’t hear many requests for ethical and responsible investment advice from their clients. However, statistics like these should be a wake up call to the profession that whether clients ask or not, half the population are already expecting you are taking into account their values and preferences beyond just financial outcomes.

It's not just the Responsible Investment Association Australasia’s research that shows us this. Outside Australia, we’re seeing a very similar context, to the extent that in Europe, financial advisers are now required to ask their clients about their sustainability preferences when providing advice.

In Australia we’re not as far from that compliance requirement than many probably believe. Under the FASEA code, it is explicitly stated that advisers are required to consider the broader long term interests of their clients. The code’s explanatory notes also states that advisers should limit their product recommendations to responsible and ethical products where appropriate. Furthermore, Likewise, FASEA’s guidance suggests that advisers have a duty to be aware of available products in the market and look beyond their approved product list if it is in the best interests of the client.

If you’re still unconvinced, performance is another good reason to skill up on sustainable investment options. RIAA’s annual Responsible Investment Benchmark Report – alongside a plethora of other independent local and global research – reaffirms that responsible investments make good financial sense. In 2020, responsible investment international share and multi-sector growth funds largely performed better than the market, even though overall fund performance was down largely due to the impact of COVID on economies worldwide.  

It's these factors that are leading to a sizeable shift across investment markets to embrace responsible investment. Many new products are entering the market, investment platforms are establishing ESG product menus, and model portfolios are being set up to account for this interest. Leading advisers are embracing the charge, building their client books, with strong, long term relationships.

For financial advisers, the work needs to begin now. You’ll need to be knowledgeable to walk your clients through an appropriate fact-finding process, to properly understand the desires of your clients. You’ll need to navigate the jargon of the industry, from ESG to impact, sustainable to ethical. You’ll need to be able to discern a good quality product from a marketing spin. And you’ll need to have meaningful discussions about clients' personal values; something that robo-advice can’t beat.

Your clients deserve it and will demand it.

There are lots of information out there. The Responsible Investment Association Australasia (RIAA) provides various avenues for financial advisers to get and stay on top of these developments. Our RI Australia conference in Sydney and online on 6 & 7 April has a special stream for advisers to accelerate their learning in this space and garner CPD points in the process.

Clients are on the money, learning that doing good can often mean doing well, with almost two-thirds (64 per cent) of Australians surveyed agreeing that responsible and ethical super funds and investments perform better in the long run. Most Australians would be more likely to invest in a product that has been certified or labelled as responsible by a third party (such as RIAA certification). They’re telling us they want more transparency, greater disclosure, and importantly that they’d save and invest more if they knew their investments made a positive difference in the world.

Sustainable investing is no longer a choice for financial advisers; it will help you remain competitive and relevant in an increasingly automated marketplace. And be assured, it will go miles in helping build stronger and long-term relationships to underpin your business.

RIAA will hold RI Australia 2022, the annual and largest responsible investment conference in the Southern Hemisphere on 6 & 7 April 2022 in Sydney at the ICC, and online. The conference attracts CPD points for financial advisers.

Register here and receive a 50% discount as an IFA subscriber using the code IFA50: https://riaa.glueup.com/event/ri-australia-2022-42236/home.html

Simon O’Connor, CEO, Responsible Investment Association Australasia (RIAA)

Embrace ESG or be prepared for loss
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