ESG is big news right now and looks set to get even bigger.
As a concept, it is all about the environmental, social and governance (ESG) issues that companies should consider when running their businesses.
Until recently, it was due to become a legal requirement, thanks to the EU Disclosure Regulation on sustainability-related disclosures in the financial services sector.
However, with a fair few other issues going on in the world right now, the FCA has confirmed that this will no longer be a regulatory issue – but are they making a mistake?
I have previously written about my initial misgivings surrounding ESG; at first I thought it was just a fad, as we have seen so many times before in the financial services sector.
But at the heart of it, ESG is a framework for how to do things properly. It has come off the back of the Paris Accord, which is primarily concerned with climate change, yet creates a world where everyone can make a difference – the Greta Thunberg effect.
And this is where I believe the FCA has taken its foot off the pedal in not making consideration of a firm’s ESG mandatory when it comes to investments.
Because when the EU initially grabbed hold of it and announced it would become compulsory in 2021, that was when it became real for advisors, as opposed to an optional extra.
However, the FCA has pulled back on this, realising that pounding the industry with yet another compunction, in the middle of a pandemic, with the resulting economic slowdown and 4,000 financial services firms reporting fiscal pressures, could be damaging.
So, although I believe that, ultimately, the FCA has made their decision for the right reasons (for a change), it is at risk of sending the message that ESG can be an optional extra – it is not.
No longer an add-on
ESG has got to be something that every business is involved in; it must be integrated within them, not just become another part of the investment terminology.
Whether you are a multi-national like Shell or a ten-strong team like we are at Paraplanning Hub, everyone can do their bit.
Because if it becomes one of the key ways in which firms are chosen for investments, then that will be a more important driver for change than any guidance from on high.
If funds are not investing in companies with a poor ESG record, then they will struggle to make money, their share value will fall – so essentially, they will be forced to do the right thing. Ultimately, it’s advisor activism supporting shareholder activism.
A slow start
It is also true that, without regulatory input, what we are finding in the industry is that too many people are waiting to be told to do the right thing, rather than grabbing the bull by the horns and just getting on with it.
This is partly due to a lack of client demand; in the past 18 months, we have seen only a handful of clients with specific socially responsible investing issues, out of 100s.
So it’s fair to say we’re a long way from public being a key driver of this, although the recent behaviour of companies such as Boohoo and Compass has very much been entering the public consciousness over recent months, which will no doubt have a trickle-down effect.
What can advisors do now?
My first thought is that advisors need to make sure their own houses are in order; look at the ESG process, how they treat employees, assess their own environmental footprint.
Next, they can start looking at the ESG-compliant investments out there and seeing if they can become a core part of an advisors’ offering.
Because if I were advising clients right now, I would be making ESG the key consideration in where we invested money; it would be the only way we would do it as it is the right thing to do.
At Paraplanning Hub, we are actively working with advisors looking at their central investment propositions, and we have gone from simply including an ESG section to making it key to the CPI and then building out from it.
And for us, it is an exciting time, because it is becoming clear that some funds are not being excluded because of costs or geography, but because they are poor ESG funds, and so we’re seeing that positive change filter through.
The future of ESG
As far as I can see, this is exactly the right scenario for advisors to be brave, grab hold of ESG and own it. Because how else do you add value as an advisor? By doing good.
To use a topical example, I think of it as similar to the journey we have gone on with masks over the course of the pandemic. Early adopters were scoffed at, seen as weird. Then we came to the stage where it was compulsory, and now the majority of people do it as standard – they want to do it. It was always the right thing to do, but it took a long time to get there.
And it is the same with ESG; advisors should be recommending that clients only invest in good companies, who want to do the right thing, until it becomes standard.
My motto has always been start now and get perfect later, and ESG is a perfect example of why something is always better than nothing.