Ethical investment-focused financial planning company Ethinvest senior financial adviser Mike Josephson told InvestorDaily that while advisers may be willing to offer investment advice around environmental, social, and governance (ESG) products to eager clients, their advice practice might not provide the flexibility of offering these products on their approved product lists (APL).
“Moreover, it could be very difficult for advisers to get those one-off approvals to use ESG funds, which were perhaps considered riskier or more expensive. Sometimes, they might not be clearly researched,” Mr Josephson said.
While noting that advice practices have increasingly been including ESG solutions on their APLs, Mr Josephson said some practices might not be doing so due to lingering scepticism around appetite for the products.
“Historically, Australia has had and still has a very large allocation to the resources sector, which makes up around a third of our share market here,” he said.
“Because of that dominant position, that can also be a bit tricky to manage if a client doesn’t want exposure to mining or resources. Interestingly, it’s changing because I think people also realise that for the green economy, we need to start looking for mining companies that are in lithium and other materials.”
To manage expectations around what ESG advice services a practice could offer them, Mr Josephson suggested that advisers could avoid promising clients that they can construct an ESG portfolio that would meet their requirements if they are unable to do it, lack the expertise, or if the products are unavailable on their APLs.
“I think clients who are concerned around ESG and ethical issues in their investments do tend to look really closely at their investment mix and dig a little deeper,” Mr Josephson said.
“Ultimately, they will become frustrated and unhappy if you can’t deliver it. It’s better just to be transparent and upfront and tell them that it is not your area of expertise or it is not your house view.”
However, he suggested that as more clients demand ethical investment products (driven by concerns around issues like climate change and human rights), and advisers are subject to increased compliance requirements, having these products on the APL would be easier than seeking one-off approvals for specific products.
“I think it makes sense for any APL to have these products on their APLs so they’re prepared to serve clients who are interested in ethical investing rather than worrying about not having the products,” Mr Josephson said.
“Let’s anticipate that we might get this request and have solutions on our APL that we have vetted and believe are well constructed, reasonably priced, and deliver competitive returns. This creates a positive feedback loop, where if it’s there, it gets used. If the experience is positive, more advisers will use it and be able to offer advice around these solutions.”
In the first instance as part of the “know your client” process, advisers could use questionnaires to ask clients about their values and ethics, what they are interested in investing in, and whether there are particular areas they would like to support (like sustainable funds) or avoid (for example, large carbon emitters).
“I don’t think there’s a right or wrong approach but I do think it’s important to try and find out if the client has any concerns in these areas,” Mr Josephson said.
“I think it gives us a certain stickiness in client relationships and clients can be a bit more engaged around some of this stuff if they’re interested in it.”
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