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Closing the sustainable investment gap

By Richard Gillham, Financial Planner at Progeny

Recent research by Aegon found that nearly 60% of investors surveyed wanted their money to be invested sustainably, but only about a third had actually taken steps to achieve this. This is the ‘sustainability gap’.

It’s where the sustainability instinct is identifiable in other areas of their day-to-day life, (e.g. recycling; avoiding single use plastics; buying local produce) but does not translate into investing in funds that have sustainability criteria built in.

The fact that the sustainable investment industry is still in its infancy explains some of the mismatch between desire and investment reality but it’s also a product of the lack of in-depth understanding amongst retail clients.

Why it matters

This matters because better alignment between people’s underlying sustainability philosophy and their choice of sustainable investments is likely to have a positive impact on their attitude to financial planning.

According to UBS’s latest Own Your Worth report, nine out of 10 women surveyed believe that money is a tool that can be used to enable them to make greater impact in the world. In this context, sustainable investing could be seen as an important factor in closing the gender investment gap.

It’s also fundamental to engaging the younger generations, as millennials, post-pandemic, are leading the way in their appetite for sustainable investing and Gen Z are characterised by the importance they place on sustainability in all areas of their lives.

There are a number of ways we can tackle the sustainability gap.

Raising credibility

‘Greenwashing’ is a growing concern for investors, amplified by recent headlines undermining the integrity of ESG approaches at certain fund groups, and fuelling the need for standardised, independent, third-party sustainability ratings.

Until this happens, advisers play an important role in explaining the broader sustainability context, backing approaches where sustainable factors are fully integrated into the investment process and clearly articulating their features and benefits.

The objectives of the fund must be clearly stated and, in my experience, investors also want to hear from the fund manager themselves.  It’s also important to dig deeper, in clearly stating the fund’s holdings, and to provide that third-party validation.

Increasing education

Advisers can also help educate clients more broadly around sustainability to aid their understanding of what are often complex issues. For example, there are many different responsible investment approaches, from ethical screening to climate indices, to fully integrated ESG and impact investing.

To do this, the advisory population also needs to improve its own understanding of sustainable investing terminology, evolving regulation, risk factors, and different approaches to integrating sustainability factors into the investment process.  By developing their own expertise, advisers will instil more confidence in clients through the ongoing sustainability discussion.

An additional issue is that fund managers typically assess a company’s sustainability or ESG credentials based on a balanced scorecard across multiple factors, whereas consumers tend to focus on a single issue such as plastics, fossil fuels or the living wage. These different perspectives can create confusion.

Advisers have a clear and present responsibility to explain the differences and what each investment approach is designed to achieve.  This will enable people to make better-informed decisions that more closely align their beliefs with their investment actions.

Leading by example

There’s also the argument that advice firms should seek to close the sustainability gaps in their own businesses.  The decision to appoint sustainability champions across a business can help drive buy-in and acts as a springboard for employee-led sustainability initiatives. This also puts a strong emphasis on internal training, engagement and development.

Achieving B Corp accreditation is one such way to show a balanced philosophy and recognise the breadth of stakeholders, from the environment to employees, in a business. A company must undergo the verification process every three years in order to recertify, so they need to really live these sustainability values.

Doing well and doing good

Many savers have strong views on issues of sustainability or social justice, but they do not feel empowered to reflect those views in how they invest.

The responsibility and opportunity for advisers is to inform and educate, to solve that lack of understanding and confidence.

An ever-growing number of clients want an investment model which does well and does good and as centres of influence, advisers have a critical role to play as the gatekeepers of private client capital.

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