Responsible investing (RI) frameworks are becoming an increasingly vital part of the client discovery stage for financial advice firms as the environmental, social and governance (ESG) investor cohort grows.
While discussions around ESG in the investment landscape typically focus on fund managers, financial advisers are also tapping into this growing demand for greener options.
The 2023 Responsible Investing Report, created by Investment Trends in partnership with Australian Ethical, recently discovered that nearly half of advisers are embedding RI into their advice process.
Leah Willis, Australian Ethical head of client relationships, has observed this growth trajectory over the past five years. Adviser adoption of RI has substantially risen from 19 per cent in 2015 to 46 per cent in 2023.
“I think it’s a pretty good result that almost one in two advisers are actually adopting RI as part of their advice proposition,” she told Money Management. “We would obviously encourage and look forward to more growth in that.”
The survey of over 600 responsible investing advisers and 1,475 investors found that 80 per cent of advisers believe it is their responsibility to ensure clients’ investments align with their personal values and principles.
Of the one in two firms utilising an ESG lens, 80 per cent are implementing it into their fact find and client discovery phase.
“This is a really great signal that [advisers] are actually incorporating it into a fundamental, upfront part of their advice process. This is not just something they are reacting to from client demand, whereas in the past, it has mostly been a client-led discussion,” Willis said.
Nathan Fradley, senior financial adviser at Tribeca Financial and director of Ethos Australia, said advisers are becoming more elaborate in how they include RI in the discovery stage.
“I’m seeing a lot more advisers embedding RI in conversations, instead of just having a checkbox in their fact find. They’re actually able to have discussions about values and future goals.”
Moreover, Fradley noted a substantial increase in advisers’ confidence regarding ESG and RI compared to initial tentativeness and fears around lack of information.
The Australian Ethical report also revealed that 34 per cent of advisers are developing their own standalone RI models in portfolio construction, up from 23 per cent last year. Meanwhile, 40 per cent are incorporating an ethical tilt into their existing models.
Willis explained: “Even if an adviser doesn’t want to create a bespoke RI model, they are starting to put ethical, sustainable and responsible investing options as a tilt within their mainstream models.”
This reflects a maturing of ESG investment overall as advisers realise the positive outcomes and rewards that it offers, she added.
“That’s also been driven by an increase in availability of solutions. I’m seeing a lot of advisers using separately managed accounts (SMAs) or diversified funds in that space, so they don’t have to build their own portfolios, which takes that pressure away from them,” Fradley said.
Providing a fund manager perspective, Thomas King, chief investment officer at Nanuk Asset Management, was positively surprised by the extent to which RI is being used in advice propositions.
The fund manager invests globally in listed companies which are focused on environmental sustainability and resource efficiency. It is also recognised as a responsible investment leader by the Responsible Investment Association Australasia (RIAA).
“This probably goes to the heart of the industry’s need to accept universal terminology and base future conversations with investors on using plain language descriptions that align client portfolios to their values,” King commented.
The case for greenwashing
While the number of advisers welcoming these frameworks into their practices continues to grow, adoption barriers also continue to exist – namely, greenwashing.
In September, RIAA’s annual benchmark report found the threat of greenwashing is deterring over half of investors from RI.
Meanwhile, 47 per cent of advisers said they are increasingly challenged by greenwashing when it comes to recommending responsible investment products, the Australian Ethical report showed.
As a result, the fear among consumers of funds having over or understated their ethical practices is driving more to seek financial advice on their RI options.
Fradley remarked: “It’s two fold: scepticism around claims has been a big part of it. [Secondly] a lot of the information that was available disappeared all of a sudden.”
This describes the growing trend of “greenhushing”, when fund managers remove or drastically reduce available information on their responsible investing credentials to avoid regulatory consequences.
“It’s just not knowing what’s good, what’s not, what’s actually sustainable. Advisers are pivotal in that conversation because it’s easy to get wrong, but seeking professional assistance to save on that effort is quite important,” the senior adviser continued.
King believes the mislabelling of products for marketing purposes creates significant reputational damage to investment management and the advice industry at large.
“It misguides and confuses advisers and investors into what product offerings align with their values. An adviser can educate an investor on the risks of the investment strategy and underlying assets, which impacts the investor’s personal goals,” he said.
Nanuk provides highly transparent reporting on its ESG investment activities in order to combat this, including information for investors on areas such as carbon emissions, engagement activities, proxy voting action and sustainability data.
“However, it can be more surprising for investors if the underlying investment doesn’t align with their values due to misrepresentation by product promoters and potential misunderstanding by their adviser,” King continued.
For advisers to gain extra clarity when recommending ESG products, Fradley emphasised the importance of institutional research to help make informed decisions for their clients.
Meeting the growing demand
As awareness of RI expands across the wider investor community, Willis expects the responsible investor cohort seeking advice to grow, too.
“It’s a fairly strong pipeline of demand that will be coming advisers’ way. The more they’re able to respond to that and incorporate it into their advice processes, the bigger they will get over time,” she said.
The head of client relationships sees a natural evolution of advisers targeting younger cohorts of investors as retiree clients focus on decumulation.
With an intergenerational wealth transfer of $3.5 trillion in Australia set to occur by 2050, younger generations inheriting this money are more likely to seek ethical options.
The 2023 ASX Australian Investor Study found that 52 per cent of next-generation investors (aged 18–24) have bought or sold an investment based on ESG factors in the past 12 months.
Willis added: “I don’t think the questions and demand for advisers is going to stop. That next wave of investors is representative of the fact that they are going to look for guidance around navigating the various options in RI.”
