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  • Trust and shared values—the stuff of relationships
    Wealth management firms are reliant on trust. Showing clients that you share their personal values, behaviours and concerns, engenders trust. Valuing your judgement—and clients knowing that you’ll do the right thing by them—are integral aspects of a trusting relationship. But now, a new element has to be factored into the trust equation: ESG (Environment, Social and Governance). There’s no doubt that interest in ESG is growing, but the subject means different things to different people. Compared to income and capital growth choices, ESG comes in myriad shades of green. And there’s the rub. Unless you tread carefully, differences of opinion on the topic can put the most trusting client/adviser relationship at risk.

    What you see is not always what you get
    Understanding how a company is conducting itself with regards to E, S and G considerations is not always easy and can confuse clients. Why? Because certain aspects of ESG can appear contradictory when taken in isolation. Based on one highly visible and seemingly detrimental aspect of its operations, an oil company may be seen as an obvious no go option by an environmentally-conscious investor. Yet research may reveal a business which has an exemplary track record on the environment, pioneering social policies and strong governance—attributes that score highly in ESG terms.

    In that situation—and to maintain or reinstate the client’s trust—the adviser has to explain precisely why that company qualifies for inclusion in the portfolio. If the investor still feels strongly about the issue then a different ‘ethical’ strategy could be employed, such as traditional negative screening (no weapons, tobacco, nuclear power etc.) or advanced impact investing strategies. That’s why ESG investing will inevitably lead to more conversations with clients, and in the process, deepen the understanding that exists between client and adviser.  

    Who, or what, are you to believe?
    The ESG waters are further muddied by the fact that the third-party data providers and ratings agencies use their own proprietary methodologies, metrics, weightings—and even definitions—of ESG investing. What is agreed, is that ESG is about how the entity conducts itself rather than its purpose. Whilst that may not help you navigate moral or ethical concerns; it is invaluable in understanding the long-term prospects of a business.

    For example, is the firm at risk of being penalised for its environmental policy or lack of it? Will demand for its products fall when questionable employment practices in the supply chain are exposed? Or might the company’s worth rise because its carbon footprint is significantly smaller than its directly comparable peers?

    Time to pull the loose ends together
    Plans are afoot to produce templates along the lines of the MiFID EMT, but who’s going to assess the relative merits of products? Ultimately and inevitably, ESG benchmarks will be founded on quality research and qualitative data. Templates for sharing this information will help, but templates will do nothing to improve the quality of the data. For the more activist investor, a cheap and cheerful ESG rating is simply not going to hack it.

    Technology can show you what’s what
    Fortunately—and providing you have the tools—understanding ESG is an area where technology can be used to bolster the trust that exists between adviser and client. Using aggregated data from the best sources, we are creating on-demand services which will provide an ESG X-ray of portfolios and enable investment managers to optimise holdings. Clients will know exactly the ins and outs of their of their ESG investments. No ifs, buts or misunderstandings, and all based on entirely objective analysis.

    Just the one shade of green
    To make appropriate, justifiable and compliant decisions, advisers, investment managers and clients will need comprehensive and consistent data coupled with technology that reveals the integrity of a portfolio. Without that support, there will always be too many shades of green to choose from.

    JHC's client conference will have an industry panel focusing on ESG with representatives from Charles Stanley, the Wisdom Council and Impact Investing Institute on the 14th November.