ESG is both a headache and an opportunity for advisers. The finance industry is uniquely positioned to affect climate change. However, knowing how to do this effectively can pose a challenge.
Sustainable data providers are split on how they rate firms. For example, some give energy companies very high ESG ratings because of their power to make society less reliant on fossil fuels, while others give them a very low rating because their processes are currently so carbon intensive.
Understanding this and coming up with an effective ESG investing solution is very difficult for both advisers and their clients.
Two firms have come up with solutions aimed at simplifying this process, both for clients and advisers. Pacific Asset Management (PAM) has launched EnlightenESG, while Financial Software Limited (FSL) has developed ETHiX.
Will Thompson, chief sustainability officer at PAM, acknowledges there are big concerns about greenwashing in the industry.
However, he questions whether wealth managers are equipped to ask these questions and make informed decisions based on their findings.
This is what motivated PAM to create EnlightenESG.
It is a simple tool that aims to ascertain a client’s appetite for sustainable investing and the areas they are most concerned about.
EnlightenESG is a questionnaire which clients can answer. It should not take more than 10 minutes to complete, but aims to offer a more comprehensive assessment of ESG sentiment than the standard Know Your Customer (KYC) checks.
It has three sections. The first asks about a client’s general lifestyle. For example, do they recycle or look to offset their carbon when travelling? Then, it aims to assess a client’s philosophical views to determine which issues – if any – matter most to them.
Finally, it asks the “what if” questions. These aim to establish how happy a client would be to sacrifice financial returns in order to have more sustainable investments, or whether they would be open to paying a higher fee to do this, for example.
The results are normalised against peers to try and give as accurate a representation of a client’s appetite for ESG investments as possible.
Clients are given five outcomes, ranging from citizen (not very interested in ESG) to impact (extremely interested). They – along with their adviser – also receive a detailed report explaining what this means, the areas they are most interested in and how they could adopt this into their investment strategy.
Crucially, it does not lead to a specific fund recommendation or a sales pitch. Instead, clients and advisers are given some areas they may want to look into as well as some suggested reading on these areas.
Ideally, wealth managers will encourage their clients to complete the survey once a year, to pick up on any attitude and sentiment changes over time.
Mr Thompson believes the survey offers the adviser conversation that is missing. It gives wealth managers clear documentation and a structure to their ESG-related conversations so they can make the best decisions for their clients.
Meanwhile, ETHiX aims to help at a slightly later stage. At its most simple level, it examines the companies within a portfolio and gives a detailed ESG score.
Portfolios are given a score out of 100 based on their ESG credentials, with 100 being the best score.
The results are then broken down into the three areas: environmental, social and governance, and given an individual score for each of these.
Users can then look even closer and see how a portfolio performs in specific aspects of each of these sections, like resource efficiency, education & work conditions, prevention and management ethics.
Usefully, users can view an issuers performance over the past five years so advisers can assess a company’s direction of travel and whether it is taking the necessary steps to become more ESG-friendly.
It is also possible to compare a current portfolio to an index like the FTSE 100 or an inhouse model portfolio to see how one portfolio rates against another.
The ETHIX “What if” tool also allows users to manipulate their portfolio to try and achieve a higher ESG rating. Advisers can also target specific areas that might interest their client, such as human rights or pollution prevention.
Over time, the tax implications of certain changes calculated using the CGiX platform will be displayed too. This means advisers will be able to see the financial implications of transitioning portfolios to be more ESG and allow them to plan their strategy accordingly.
It uses data from Owl Analytics, which gives a consensus across 500 data sources, including MSCI and Sustainalytics. FSL chose Owl’s data as it gives a relatively consensus view across the spectrum of data providers, given they can be so variable. Owl’s issuer coverage is 25,000+ and in excess of 100,000 funds.
ETHiX, which has been developed in collaboration with Canaccord Genuity Wealth Management, is currently in Beta testing mode and is planning to launch to the whole market later this year.
