Retail investor demand for ESG products across the spectrum is intensifying, but advisers are still working to incorporate questions to figure out their clients' appetite for products in the ethical space.
Moving from conversation to action, and looking at whether impact investing is a space that is accessible to retail investors are two topics for discussion at sessions during the forthcoming Responsible Investment Association Australasia (RIAA) Australia 2021 conference, on May 7.
FS Sustainability is the media partner for the event.
Alexandra Brown, founder of Invest with Ethics, recommends that advisers take a "proactive" approach and ask clients about their ethical investment preferences at part of their regular client profiling questionnaire.
"I wouldn't suggest asking them outright, as many clients wouldn't understand what is meant by ethical or responsible investing," she says. "Instead, for the initial conversation, I would keep things quite open-ended such as "are there any companies or particular industries you would like to avoid in your investment portfolio?" or 'are there any social or environmental issues that you feel strongly about that we should consider when selecting investments for your portfolio?' I'd include a similar question or two to find out if there are any issues, companies, or sectors that their client would like to support or preference in their portfolio."
Asking these questions isn't just a "nice to have," but is being driven by increase in client demand and expectations, Brown says. She points to a recent report by RIAA looking at consumer expectations in Australia. The report finds that 86% Australians believe it's important their financial adviser asks them about their interests and values in relation to their investments.
The challenge for advisers, beyond having those conversations with clients, is that matching clients' ethical preferences to one single product is "unlikely."
"Advisers should look at the underlying holdings and discuss any companies of concern with the client before the portfolio is finalised," Brown notes.
RIAA operates the Responsible Returns website and Brown also points to the Leaf Ratings from the Ethical Advisers' Co-op provides an easy-to-read fact sheet that highlights any companies that may be of concern to clients.
"These ethical fund ratings help advisers to see at a glance which investment and super funds are providing stronger screens and more transparency around holdings, voting and engagement," she says. "Open discussions like this are another way an adviser can involve their client."
In addition to evolving their practice to include discussions of ethical concerns from their clients, they are also asking questions about access to the impact investing sector. Impact investing refers to investments that explicitly target social and/or environmental performance.
In most cases, access to impact investments is limited to private wealth clients ,including high net worth, family offices, foundations and similar, notes Farren Williams, adviser and partner at Koda Capital.
"From a democratisation point of view, if we mean widespread access to impact investing, there are some very practical constraints that apply at the moment in terms of the industry and product structure," Williams says.
Williams points to superannuation options as one way for people to access impact themes.
"If we're talking about someone who does not have a pool of several million dollars, then one avenue is for them is to harness their superannuation, because there are some super funds that are doing some really meaningful work in this space and are able to access the institutional impact investment market, providing members with exposure to impact investments they would not otherwise be able to access," she says.
There is more product coming to market that targets positive impact in equities and fixed income strategies that are available to retail investors, but Williams explains the majority are restricted to wholesale investors.
"Having said that, every investment you make has an impact of one sort or another," she says. "If you are mindful about what your values are and what sorts of positive change in the world you want to contribute to, a reasonable starting point is to look at businesses or projects that are going to result in a net benefit in that area without causing harm in other areas."