Climate change part of clients’ best interest

Financial advisers are likely going to have to make environmental, social and governance (ESG) decisions for client portfolios whether or not clients express any interest, as climate change policies will ultimately affect a client’s best financial interests.

Louise Watson, Natixis Investment Managers managing director, said even if an adviser or a client had no view on ESG issues, many funds were already integrating ESG into the way they manage money.

“What we’re seeing now is that businesses have got good governance, good social practices and are doing everything across UN Sustainable Development Goals [SDGs] and ticking those ESG metrics [and] those businesses are outperforming,” Watson said.

“We’re seeing portfolio managers integrate UN SDGs into their portfolio, because that’s leading to better business models.

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“Even if you don’t express a view, many of these funds are integrating ESG into the way they manage money.”

Jessie Pettigrew, BT head of ESG and sustainability, said over the long-term good management of ESG factors would positively influence risk-adjusted returns.

“While it’s important for advisers to understand how ESG issues are being considered in the funds and investments they recommend, they don’t have to use all the tools in their kit, but they may want to make their clients aware,” Pettigrew said.

“For advisers, understanding if, how and why an investment or investment manager considers ESG is important.”

Pettigrew pointed to the Australian Prudential Regulation Authority (APRA) as it wrote to regulated entities encouraging them to consider the impact of climate change on their operations and the Reserve Bank of Australia (RBA) who described how climate change was factored into its monetary policy decisions.

But there was also the Financial Adviser Standards and Ethics Authority’s (FASEA) code of ethics which meant it was part of considering clients’ best interest.

Brett Jollie, abrdn Australia managing director, agreed that if advisers were not looking at ESG on behalf of their clients then they were not acting in clients’ best interests.

Con Koromilas, abrdn Australia head of distribution, added that fund flows into ESG products had increased drastically in the last quarter compared to all four quarters in the previous year.

“We’ve been slow in this market adopting the ESG aspect in portfolio construction,” Koromilas said.

“Even 12 to 24 months ago I don’t think it was even on the agenda… whereas that’s changed a lot and we’ll see if that trend continues or if it was an aberration.”