While it’s certainly valid to say “I don’t want to focus on impact funds that address one issue in the RI sphere, such as climate change,” it would be detrimental for your business to disregard how ESG factors play a role in the management of client portfolios – especially for those invested over the longer-term. For example, Facebook showed many warning signs (from an ESG lens) prior to the massive data breach it experienced in 2018 that led to the biggest one-day drop in market value of any company in history. In retrospect, many could have avoided Facebook’s negative impact on their portfolio performance if they had incorporated governance factors into their decision-making processes.
Perhaps the biggest hurdle facing advisers is the fear that RI approaches could conflict with fiduciary duty, or that these strategies can detract from performance. In fact, numerous studies have found evidence to support that taking ESG into account can help protect against volatility and downside risk.3
Research from data provider Morningstar examining the long-term performance of a sample of 745 Europe-based sustainable funds shows that the majority of strategies have done better than non-ESG funds over one, three, five and 10 years.4 That’s why it’s vital for advisers to take the time to understand what RI is – and what it’s not.
We already know that investors are interested in RI. The 2018 HM #InvestInAbetterWorld survey indicated that 2 out of 3 respondents thought that financial institutions should avoid investing in companies that harm people or the planet. 5
The client conversation: becoming the subject matter expert
So how do you incorporate RI into the client conversation?
As a first step, education is paramount in order to be effective. While you don’t need to be a specialist on every aspect of RI, you should be able to tell the story, including what it represents today, and what it means in terms of strategies and the various approaches. Whether that means taking a course, or speaking to an expert, it’s incumbent on advisers to grow your knowledge base as part of your professional development.
To start you down the path, click here for an RI Investment Spectrum to help you decode the intricate world of RI and assist you with your client conversations.