Outsourcing and ESG – the grass may well be ‘greener’

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"Now more than ever, clients want clarity on how and where their money is invested. Greater awareness of the environmental and social challenges we all face is driving this."

With the continued rise of conscientious clients there's now another key reason to consider outsourcing – and it's green all over. In an ever changing investment world we explore the key drivers for change and why now is a good time to ensure you are fit and ready for a greener future and positioned to deliver great investment outcomes for your clients.

More and more advisers are choosing to outsource their investment management to discretionary fund managers (DFM). And the merits of doing so are well known. It can save time and money. It can help mitigate risk. It can also offer clients access to wider investment opportunities and expertise.

Now though, there's another pressing reason to consider outsourcing – and it's green all over.

The rise and rise of conscientious clients

Now more than ever, clients want clarity on how and where their money is invested. Greater awareness of the environmental and social challenges we all face is driving this. Climate change, polluted oceans, human rights abuse and the transition to cleaner sources of energy. These are just a few reasons why many of us are making sustainable choices in all areas of our lives.

Now we have a global pandemic that has, in many respects, further divided the 'haves' from the 'have nots'. Add to this a growing number of millennials joining the ranks of investors – a cohort we know is more socially conscious and environmentally aware – and it's easy to see why there is such a surge in responsible investing.

From niche, to mainstream, to mandatory

As demand for investments that go beyond the financial return has grown over the past few years, regulators are paying attention. As this area of investing moves from niche to mainstream, there's a whole raft of new regulations coming down the track.

While most jurisdictions are implementing ESG regulation, a large volume currently comes from Europe. There is the EU Action Plan for Financing Sustainable Growth, which includes the EU Taxonomy, a classification system, and the EU Climate Transition and EU Paris-aligned benchmark labels. This is in addition to a broad range of disclosure requirements. Then there are amendments to Mifid II, scheduled for Q1 2021, which mean you must ask your clients about their environmental, social and governance (ESG) preferences, as part of your advice process.

UK-specific regulation, meanwhile, includes the UK Green Finance Strategy and the updated UK Stewardship Code. What's more, there are moves to change the 'comply OR explain' concept that is integral to the voluntary corporate governance code in the UK and elsewhere, to 'comply AND explain'.

We know these new regulations add to the already lengthy list of rules and directives with which the adviser community already grapples. They'll impact your business, in terms of suitability, disclosure, fact finding and of course the types of investments you recommend. Which raises the question; is your business prepared for this explosion in client demand and such regulatory rigour?

Speaking a different language

Given this backdrop, we expect your conversations with clients to increasingly feature ESG, sustainable and responsible investing themes. Indeed, many of your clients may come to expect social and environmental criteria in their investments as standard. But this is a rapidly evolving area and we understand that there's a lot to keep up with.

For the investment managers and solutions you recommend, we understand that it's important to know if and how they integrate various responsible investing factors in their investment process. And you need to then be able to articulate these to your clients. That maybe easy enough if the investment manager is transparent and has a demonstrable track record in this area. For instance, if they publish their voting and engagement activity. However, you may find yourself having to rethink your solution providers if this type of information isn't forthcoming.

What about your clients? Different levels of understanding need different approaches. You'll have some clients that know very little about incorporating sustainability in their savings and investments, but who want to know more. This calls for support and education. Equally, you'll probably have clients that are extremely clued up. They understand that they can use their money to create a better and more sustainable future, while tapping into the opportunities this presents. Their desire is not just philanthropic, as they need their investments to make a financial return. However, many of them have a good understanding of how ESG factors and that the way companies manage these, can lead to better long-term performance.

Regardless of client type, it's key that you can speak with confidence on the benefits of responsible investing. You'll need to explain how these approaches can affect investment performance and recommend the best solutions. Can you be sure the investments you deem suitable are fully transparent on ESG criteria? Then there's other information such as ESG scoring and carbon emissions reporting to think about.

All this is on top of your usual financial planning responsibilities. That's more scrutiny and more business risk around an evolving theme on which you may need support and training yourself.

Going greener

For advisers who haven't already outsourced their investment management, now could be an opportune time to consider doing so. Do you continue being all things to all clients – financial planner, tax expert, investment manager – and now ESG specialist? Or outsource your investment management to a discretionary fund manager (DFM) that can help lighten the burden? Choose wisely though. Not all DFMs are equal in terms of their commitment to responsible and sustainable investing. Due diligence is, therefore, vital.

At Aberdeen Standard Capital, investing for a better future is our vision. It's ingrained in everything we do, so that we can aim to generate the best long-term investment outcomes for all our clients. As the discretionary investment arm of Aberdeen Standard Investment, we are part of a heritage that has been analysing ESG factors for over 30 years. This allows us to assess the quality of our investments and better-understand the key risks and opportunities. We believe this can generate better outcomes for everyone – clients, society and the wider world.

ESG considerations underpin all our investment activities and are crucial to each investment case. In addition, from thematic strategies looking at climate change, to portfolios built using various ethical screens or positive impact investments, we have award-winning* credentials for responsible investing. We can offer bespoke ethical, impact investing, climate aware and socially responsible portfolios too. We also have a newly-launched sustainable managed portfolio service that could help your clients meet their sustainability goals.

Outsourcing could potentially save you time, reduce costs and help mitigate investment risk. It could also help fortify your business for the opportunities ahead in this rapidly-evolving 'green' space. Could you give the 'green' light to outsourcing?

To find out more, please get in touch with your usual contact at Aberdeen Standard Capital.

You can also email us at asc@aberdeenstandard.com or visit: aberdeenstandardcapital.com/responsibleinvesting

* PAM Awards 2019 Winner: Sustainable Investment Solution Investment Week Sustainable & ESG Investment Awards 2019 - Best ESG Manager / DFM Group

© Aberdeen Standard Capital

Aberdeen Standard Capital is the discretionary investment arm of Aberdeen Standard Investments, the asset management division of Standard Life Aberdeen group.

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