EEE ESS GEE: The Sequel

The thing about writing two-part articles is you don't have to think too hard about a witty introduction to catch the eye. All you need to do is point back to the last one and get cracking. Watch how easy it is…

Picture of a curved office building
"The financial services sector has done with ESG what it has always done. And that's raced faster than a fast thing into product and solution mode before fully understanding the dynamics and practicalities of what's needed."

In the last issue of Connection, the ESG special edition, I mentioned that we were in the thick of writing our very first ESG White Paper ('Crossing the ESG Event Horizon' If you do insist on asking) that looks at some of the issues that are keeping us up at night in the context of the issue that seems to be taking over the investment world. Well, here I am one quarter later armed with some results from our research.

See? Man that was straightforward. Big fan of two-part articles.

Ultimately, we reckon that the financial services sector has done with ESG what it has always done. And that's raced faster than a fast thing into product and solution mode before fully understanding the dynamics and practicalities of what's needed. If our report has a big, hairy core hypothesis at the centre of it, then that's it.

Our views only go so far though, we wanted to ask the people who actually matter. That's why we got over 300 members of our adviser panel to take part in a study and commissioned YouGov to carry out a bespoke exercise with over 1,800 members of their consumer panel. Here's some of the main headlines:

Adviser Research

  • Advisers estimate that the proportion of ESG investments recommended in five years will be 48%, compared to just 19% today.
  • Advice firms are already adjusting processes in expectation of greater regulation around ESG and increasing retail demand for ethical investments. Three quarters (73%) of those who took part already have some degree of process around ESG at the fact-finding and suitability discussion end of things and 23% report they are actively constructing a process now.
  • However, our research also exposes the difficulty in making informed choices about ESG investments. Eight in 10 agree that confusing terminology hampers the selection process, while more than two fifths (44%) feel they don't have the tools or materials to properly assess ESG solutions for their clients. Three fifths (60%) believe the solution is for asset managers to transition to ESG factor assessment as standard.

Consumer Research

  • The coronavirus pandemic seems to have made more people want to buy local and make purchases in line with their principals. Over two thirds (68%) of the research respondents are now more likely to support local businesses over national or international companies, while almost half (47%) say their buying choices are influenced by a firm's ethics and its treatment of people.
  • This stance seems to reach over into finances too, with nearly a third (30%) of those surveyed reporting that they are now more likely to save and invest in line with their personal ethics. In addition, two fifths (40%) of respondents would accept a lower investment return to know their savings and investments reflected their ethics and a similar number (41%) would pay more in charges.

The research gave us plenty to think about and following much head-scratching and questionable lockdown facial-hair stroking, we tried to simplify a fiercely debated part of the sector into distinct themes. Here's a couple that continue to keep me awake at night, one full quarter on.

Clarity

ESG has become an amorphous, catch-all phrase for a number of distinct issues, creating all sorts of problems at a practical sense. At product level, there are a plethora of investment solutions branded ESG but with conflating terminology, making it torturously difficult for anyone to make an informed comparison.

And at a wider level, we reckon that the sector would do well to draw clear lines between corporate behaviour & reporting, investment solutions (the products and services marketed as ESG) and the practise of matching investment choices to individual beliefs. Those are three completely distinct issues that require their own attention.

Conflict

The notion of ESG investing is at odds with recent sector developments. The advice sector continues to evolve towards a consultative, life-coaching, objective-oriented environment, focussed on the client rather than the product. The potential for future regulation to mandate the measurement and implementation of individual sustainability beliefs hints back to product-centric recommendations.

Consider further that the overwhelming majority (over 85%) of firms use Centralised Investment Propositions. With platform architecture doing much of the heavy lifting, the sector has manufactured itself to a point where stepping inside of that process to cater for individual beliefs is counter-intuitive (and administratively problematic).

Pragmatism

There will no doubt be a power of work done within service providers, research agencies, platforms and regulators to work together in developing a coherent framework that supports advisers and consumers better and also turns noise into something more practical for ESG investing. But we reckon that irrespective of how sophisticated a place technology, disclosure requirements and other such parts of the supply and demand side get to, we will always be at the mercy of individual value-assessments. To borrow our final line from the paper, let's be pragmatic about progress and not let perfect get in the way of better.

I'll be back next quarter with a different topic. No-one wants a threequel. You've seen Godfather 3 to know how that can turn out.

Visit www.langcatfinancial.co.uk for more from Steve and the rest of the lang cats.