According to recently released data from Netwealth, there is a clear opportunity for financial advisers to step into the responsible investing (RI) “knowledge vacuum”, which currently numbers over two-thirds of Australians.
The firm’s Investing for good white paper revealed that as many as seven in 10 (71 per cent) investors rate their understanding of RI as average or non-existent, while around two-thirds would definitely or possibly consider investing in responsible investments with the right education.
Netwealth also revealed that the key drivers behind RI are a desire for positive impact and for financial benefit, noting that the “real challenge” for advisers is to clearly demonstrate these drivers in their interaction with clients.
“There’s a growing body of evidence that responsible investing can lead to better long-term investment results because it is an approach to allocating capital, which tends to seek out and favour companies that have more sustainable business models, practices and products or services,” said Netwealth managing director, Matt Heine.
“The real challenge for advisers is to clearly demonstrate and quantify the positive impact and the financial benefits,” Mr Heine explained.
But, in order for advisers to offer the right type of advice to their clients, they themselves need to be educated.
“Advisers play a significant role in helping clients allocate capital both efficiently and, increasingly, in a socially responsible way, first by educating themselves about these investment options via managers and experts, then making a judgement call and passing on their views and knowledge to clients,” the report said.
Two areas that Netwealth believes advice firms need to examine and educate themselves in include multi-asset managers and bonds.
“There are multi-asset managers that offer balanced, growth and a high-growth, multi-asset, multimanager portfolios that embed both sustainability and ESG across each major asset class, being equities, real assets, such as property and infrastructure, and fixed income,” Netwealth explained.
As for bonds, Netwealth is referring to both green bonds and social bonds — those that raise finance for climate-related solutions, as well as those that improve social outcomes for the community.
“These bonds pay interest just like any bond, but importantly, the money that is borrowed is to only be used for predetermined projects.”
Next on an adviser’s checklist is understanding investor behaviour, the firm said.
By dividing the population into four groups — believers, pragmatists, doubters, sceptics — Netwealth explained that advisers need to take a different approach to each group in order to facilitate constructive advice discussions.
For example, according to Netwealth, advisers should pay less attention to RI strategies for the sceptics, while the doubters generally have a lower-than-average understanding of RI and should be educated first.
Ultimately, Netwealth noted that with more than one in three investors (34 per cent) expecting to increase their allocation to RI in the next five years, the opportunities for advisers to tap into that goldmine are huge.
“Investing with the aim of doing good is no longer seen as delivering poorer, long-term investment results,” Mr Heine concluded.
who has the time to educate clients about the Pandora’s box that is ESG/RI. not me. Advisers have enough to do.
All sentiments around ‘doing good’ with an investor’s money are agreed with, but it needs to be said that some ‘normal’ rules of investing apply just as much to Responsible Investments as …any other kind. Advisers must still be able to discern, evaluate and choose, then only recommend good, well managed companies, not too much ‘blue sky’ in their future projections, good cash flows, low debt, preferably with a ‘moat’ against easy competitor entry in their particular sector, and definitely producing sustainable products that have a long term future, or, like lithium, at least a U-shaped curve of rapid growth before they are technically leapfrogged by a better, cheaper product, that doesn’t leave some ecological nasties behind and have a net-zero carbon payback period from their production that is much shorter. Then there’s ‘green-washing’ to be aware of, which hopefully ASIC gets right in its policing role, helping us to identify the offenders early enough to avoid them. It’s an increasingly complex area to learn and there are still traps for over-eager players or entrants to the field of RI and its corollary, Impact Investing, which takes a more active step beyond just RI.