Advisers facing unintended consequences of sustainability
Advisers are grappling with the ‘scarcity of sustainability’ in portfolios as they find a smaller universe of investment for clients seeking sustainable options.
In a panel session at the Janus Henderson conference, Adam Hetts, global head of portfolio, construction and strategy, said there were often unintended consequences which came from implementing sustainable options.
This included the smaller universe of investment options, the difference between traditional and sustainable portfolios and their respective performance and confusion for clients.
There were two types of advisers, he said, those which created separate sustainable models and those which tried to implement it into their existing traditional ones.
Hetts said: “What we are seeing in the thousands of client portfolios that we work with every year is that these advisers are shifting from traditional mode which was how they used to view portfolios and implement their sustainable portfolios.
“There’s a tilt and there’s a major translation of these portfolios and that translation often results in these new risks that are things like regional biases, sector concentrations and style drift.
“The risk isn’t coming from the sustainability but it is coming from what we think of as the ‘scarcity of sustainability’. If you’re used to thinking about traditional portfolios and you’re transitioning to this sustainable version of investing, you have a small fraction of the opportunity set you have with traditional models.”
He gave the example of European equities where only 10% were classified as sustainable, which fell to 5% in the United States. For fixed income, they were likely to need more investment grade which meant higher interest rate risk. This left advisers with “limited building blocks” to select investments for portfolios.
“The biggest risk to me is, the short answer is just the headaches, it's those inconsistencies and those unintended or unknown risks and it just creates different portfolios. It's not good or bad; it's just different. It creates more questions, it creates more confusion for clients going to their advisers,” he said.
Recommended for you
As the first quarter of 2024 comes to a close, Money Management looks back on the corporate regulator’s bans and AFSL cancellations in the financial advice sector.
Insignia Financial is holding ‘relatively steady’ onto its rank as Australia’s second-largest financial advice licensee after the Godfrey Pembroke exit but Count is hot on its heels.
Liberal senator Slade Brockman has said the government needs to have a “cold hard look” at the level of regulation in the financial advice space and the costs of running a business.
FAAA chief executive, Sarah Abood, has warned changes in the first tranche of the QAR legislation around advice fees documentation could create more work for advisers rather than less.