How are ESG issues impacting the wealth management sector today? What has been achieved so far, what are the opportunities and threats, and what is still to be done?
While some investment fads come and go, the trends driving the need for sustainable business practices are here for the long haul.
Investors want products that fit with their values, and companies will do well to provide them. With the increasing push from the younger generation towards responsible investing, wealth managers need to match their clients’ investment horizons.
Embracing ESG investments can help future-proof portfolios against changes in the global economy. Moving from fossil fuels to renewable energy is obvious, but an increased use of artificial intelligence (AI) and new technology to help care for an ageing population and keep the environment clean, are future trends that will also benefit investors.
Wealth managers will find that accelerating interest in ESG investing brings both challenges and opportunities. With clients more interested in their portfolios reflecting and supporting the issues they care about, they need to ensure that client dialogue includes both an ethical and a risk management level.
What’s been achieved so far?
To date, ESG initiatives have been driven largely by consumer demand, accelerated by Covid-19 and the impact witnessed on the environment as a result of the global ‘pause’. Various market frameworks, such as the Sustainable Finance Disclosure Regulation (SFDR) Net Zero Asset Managers Initiative, and the Global Reporting Initiative (GRI) have also helped to promote further action.
Exactly how much substantive work has been done or the effect on overarching objectives remains unclear as many firms are taking action by developing their ESG strategies through partnerships with the ‘Big Four’. Meanwhile, smaller, newer fintechs like Plum, Chip, and Revolut, had their ESG strategies already embedded in their initial product builds and go-to-market proposals.
Opportunity and threats
Financial advisors have an opportunity to broaden their client-base and forge more lucrative relationships by recognising the significant increase in investors - across all generations - taking greater interest in more than just financial return. The pre-conception that only younger generations want to see their money work towards sustainability is outdated, as is the belief that sustainable portfolios underperform compared to non-sustainable ones.
For banks and wealth management firms, educating staff is key to deepening an ESG-first mindset that produces the type of results today’s customers demand. To ensure this education remains constant and current, employees must have access and be able to effectively engage with information that enables them to manage ESG scoring and analysis.
A double opportunity exists for financial firms to offer sustainable investing options to their customers and to be transparent about the business impact on the environment. Engineering transparency across gaps in both streams and on the delivery of plans builds the brand trust so essential for powerful relationship-building.
Embracing sustainable investments is a potent means of future-proofing portfolios for the impending changes to the global economy. Established and long-term themes such as the move away from fossil fuels remain important, but appetite is also growing for an increased use of AI and new technologies that can help care for an ageing population and protect the environment in other ways.
Ultimately, we are moving to a place where underlying investors will assess their portfolio scores in relation to financial performance and ESG, equally. As we near this new reality and towards full transparency, it will become more obvious to both wealth managers and investors which organisations are meeting expectations and which are not. As such, a real opportunity lies in building durable strategies now. Not only will this approach future-proof portfolios for the long-term but it could attract a new cohort of digitally-native, activist investors today and keep them as clients as our world and our approach to it evolves.
As opportunity abounds, so too does threat. The surge towards ESG investments has been a relatively recent phenomenon and the market is still in an embryonic phase with things moving at pace. This can make it hard for wealth managers and investors to know for sure where money can be allocated to generate the best returns across both financial and ESG metrics.
It is a situation which is not helped by the persistent ‘green-washing’ evident across multiple sectors and which remains a relatively easy practice to get away with.
What is still to be done?
Until more stringent regulations come into force that clamp down on ‘green-washing’, neither wealth managers nor investors will be able to easily ascertain which ESG investments represent the best value for money.
As with most evolutions across the wealth management sector, successful adaptation to them relies heavily on technology. Incorporating ESG into a risk management framework across the client lifecycle is still a challenge for investment firms, but a new wave of integrated ESG-ready solutions are strengthening client engagement and the delivery of operational efficiencies.
When these solutions inevitably enter the mainstream, the message will become clear: ESG needs to become fully integrated into the investment conversation and not be viewed as a topic separate to the primary investment.