Although financial advisers are required to understand their clients’ goals there is no requirement for this to include ethical, social or environmental interests.
Doing so is regarded as best practice, yet 30 years after the launch of the UK’s first retail ethical fund getting advice on this area remains somewhat hit or miss.
Some financial advisers excel in this area but more typical is the advisor who is reluctant to venture into an area that they may regard as more of an art form than a science…
A valuable art
Gauging clients’ interest in areas such as climate change, responsible share ownership or ethical concerns is undoubtedly very different from calculating how much life assurance someone might need – or selecting investment portfolios based on asset type or price. Yet developing such skills can be time well spent.
Raising such issues with clients enables them to bring their investments into line with their other lifestyle decisions.
It also gives investors the opportunity to consider the kinds of companies they believe may become increasingly successful over time – and those they would prefer to support and encourage.
That is not to imply that any of us knows which companies will be leading the way in 30, 20 or even 10 years time – but for many people ignoring issues like sustainability, climate change and demographic change makes no sense – either financially or morally.
Yet in advisors’ defence, this area is not straightforward. Sustainable, responsible and ethical investment (SRI) options offer many different ways to reflect personal opinions and goals.
Indeed the sector is sometimes criticised for being inconsistent. However, this misses the point. The SRI market has not been choreographed. It has evolved, somewhat organically, over many years. Each fund will have been launched with a particular group of investors in mind.
The diversity of this area simply results from the fact that people have different aims and opinions.
All SRI options will aim to appeal to people who are looking to do more than simply make money – and differences should be welcomed not feared. Indeed, in most cases innovation should be viewed as representing the opportunity to open this area up to more people.
Different types of options
Knowing some basics makes this field a lot easier to understand however… so here’s a brief introduction:
SRI and in particular ethical funds have different ‘policies’ and/or ‘criteria’ which set out the issues they consider.
Approaches to these issues will vary from fund to fund. Broadly speaking such options aim to avoid things, support things and/or influence things – and these approaches are applied and combined in different ways.
So, for example, some funds focus on a more traditional ethical agenda – avoiding activities like armaments and tobacco manufacture.
Others focus more on supporting (and benefiting from) companies that meet particular positive criteria or solve particular problems – like helping us to shift towards more sustainable lifestyles.
Some focus on larger companies, others on smaller companies. Yet more are in effect a mix of all the above – as they aim to ‘balance’ the pros and cons of different aspects of a company’s behaviour while (implicitly or explicitly) avoiding certain ‘no-go’ areas. Such funds currently total around £13 billion.
The biggest group, however, is options that are not normally promoted to individual investors – although major investors are often very heavily involved. These are in effect ‘tranches’ of money that are in regular funds (i.e. non-SRI funds) which are covered by ‘responsible engagement’ (or similar) strategies.
In these cases fund managers work with the companies they invest in to encourage more sustainable and responsible business strategies that they believe make sound financial sense – with the aim of enhancing their own investment performance.
Matching aims to options
To help financial advisers make better use of this area I have recently launched an online database tool. Fund EcoMarket groups funds into different ‘SRI Styles’ along the lines of those outlined above.
All regulated retail SRI funds (and some ‘responsible engagement’ options) are listed and segmented according to their SRI Styles. The tool is open for all to see. Visitors can also use an online questionnaire to identify their own ‘best fit’ SRI Styles – and are encouraged to discuss this with their financial adviser.
Fund EcoMarket is borne of a belief that SRI is an essential force for good – and that individual investors should always have the option to reflect their ethical attitudes via their investments.
Fund EcoMarket aims to encourage advisors to broach this topic with all clients as it helps to remove the burden of in depth discussions about personal interests – and free up their time so they can focus on what they do best.
In SRI it is very much ‘the more the merrier’. The more investors learn how important it is to pay attention to where they invest and act on their opinions the stronger the message.
Sending a message to companies, governments, regulators and others that there are investors who care about ethical, environmental and social issues is also valuable, as goodness knows there are enough less desirable, short-termist business pressures.
And in the light of population growth, dwindling resources and climate change business priorities are shifting.
From an investment perspective this means there will be winners and losers. So the arguments in favour of bringing such issues into the investment process are clear – even if there is no specific regulatory requirement to do so.
Individual investors should be helped to be part of this shift, not left to languish in funds that simply don’t match their view of the future or their other lifestyle choices.
This may be a small cog in the sustainability wheel – but in my view it is an important one. Things are changing and all investors should have the opportunity to participate.
Salt welcomes Julia Dreblow as a new ethical finance columnist. The fund expert will also be speaking at Salt’s Disrupting Finance event on Wednesday 16 September.
Julia has a wealth of experience in this area having been involved in financial services for over 20 years –
specialising in SRI since 1998.
– See more at: http://www.sriservices.co.uk/#sthash.3EEzht6N.dpuf