Seven wonders of the world

(according to Steve)

You've no idea how long I spent on the title of this. You'd think it would be easier. I'm about to write an article with a list of seven things and there's loads of famous groups of seven. The Magnificent Seven. Days of the week. Continents. Dwarves. The film. But nope, could I think of even a tenuous link to ESG investing that had anything to do with the number 7? No, no I couldn't. Let's all agree to remain friends and move on. Maybe one of our beloved readers has a good one and can write in?

Tall buildings in the City of London

"There's no doubt that ESG investing is capturing a certain zeitgeist of wider environmentalism and social consciousness among many in society."

Anyway, why all this chat about a number Mr Lang Cat? Well, it's an ESG bonanza edition of Connection magazine and it just so happens that this is a subject that:

  • has been on my mind for quite some time and
  • is part of the sector that is potentially problematic for a number of reasons and
  • is something we're live in the field doing both adviser and consumer research quite literally as I type.

With the permission of the good people at Synaptic, I'm going to write this as a two-parter. First off, I'm going to focus on the second bullet point there, homing in on the seven aspects of ESG investing that are giving me moments of mild consternation (which as you know, there is surely nothing worse). Next time round, I'll come armed with fresh research and peace of mind.

So here we are with the seven wonders of the world of ESG Investing…

1. Information overkill?

It's everywhere, isn't it? Webinars, seminars, articles, fund launches. One can't spend any length of time going about their business without coming across some ESG-related content. On the one hand, that's perfectly fair. Subjects are allowed to be popular and there's no doubt that ESG investing is capturing a certain zeitgeist of wider environmentalism and social consciousness among many in society. But there is a real danger, I believe, of information overkill. Especially with the sheer volume of different sub-sections all falling under the banner of 'ESG'. Which brings me onto…

2. Beep Beep - next stop the terminology conflation station

A quick Google search of 'ESG investing' 10 minutes before writing this (dear reader, I am nothing if not thorough) threw up a remarkable range of distinct bits of terminology, all legitimately falling into the ESG investing club. Positive screening. Check. Impact investing. Check. Ethical investing. Check. Sustainable investing. Check.

At best, this is tricky for those of us making sense of the rapid pace of change in this sector but at worst, I think this is potentially destructive for customers and their advisers trying to turn this into something tangible and practical for their processes.

3. A new world order

Could it be then, that a better way to address this is to take a step back and properly define a consensus across the sector of what ESG as a broad church actually means? Because for me there are at least three distinct points of 'contact', for want of a better phrase, between consumer (which in our world also means adviser) and the 'industry'.

ESG could mean corporate governance and what that means for business to business due diligence. It could also mean distinct ranges of funds or 'solutions' that fall under the banner of ESG investing. And it could potentially also mean how we design better technology and processes to identify and map individual beliefs into the staggering range of investment choice out there. These are all very different things.

4. Demand?

On that last point there, there's a danger of us sacks of meat in the sector collectively assuming that there's tonnes of demand out there in consumer-land. Our research with advisers has painted a mixed picture. You'll see from the table below from our annual adviser omnibus research in 2019 that around half of firms state that customers either 'never' or 'hardly ever' proactively raise the subject of ESG or ethical investing with them.

Now, this is going to pivot on the proverbial sixpence next year if, as we assume, the new suitability rules requiring specific ESG fact-finding are indeed mandated but how is that going to play out if the demand is sketchy?

A quick three to finish off with as I haven't quite got my head around how I feel about these but, if anything, they're giving me more consternation than the others and I'm on the figurative edge of my metaphorical seat.

Bar Chart

5. Rating/screening services

Also sketchy to me is that BooHoo situation. We all know the story so no need for me to go over it again but it feels intolerable to me that this could have happened. It's easy to throw stones (fun too), but these things don't happen without reason. It feels to me that there's significant work to be done here as our understanding of what ESG means at a practical and transactional level develops over time.

6. (De?) Centralised Investment Propositions (CIPs)

We know from our regular research that over 80% of firms run a CIP. What happens to that CIP if individual customer ethical, social and political beliefs are taken into account? Are bespoke portfolios desirable? Is any alternative simply a watered-down solution? Can technology sit in the middle and solve some of this? SO MANY QUESTIONS STEVE.

7. ESG at a premium?

Just squeezing in at the end of my worry list is the widely-held belief that investing in an ESG range will inevitably come at a premium - either via additional cost or potentially restricted returns. Many people cleverer than me refute this, and who am I as a humble Fifer with more questions than answers to doubt this? But many of these people also have ESG ranges to sell you. So there's that.

There we have it, seven things keeping me awake at night and so, so many questions. I'll be back next quarter armed with some answers and indefatigable positivity. See you next time.

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