Do clients care about climate change?

With one of the worst bushfire seasons ravaging Australia over the last four months, lost homes and the massive loss of wildlife has once again drawn the attention of the investment community and individual investors to climate change.

It has become obvious that companies that have been prioritising and focusing on returns without paying enough attention to the environmental, social, and governance (ESG) aspects of their operations no longer look attractive for a growing number of investors. 

Along with higher ESG awareness, shareholders have begun more than ever to look for more diverse investment options which sit well with their personal beliefs and values and those companies that truly take into account ESG considerations.

Almost all advisers have admitted that a responsible investment theme has been on the rise among their clients compared to a few years back. And with an increased number of clients enquiring about responsible investing and searching for more information, both fund managers and advisers have felt a growing pressure to adjust their product portfolios and strategies accordingly.

Based in Esperance, Western Australia, financial planner Tamara Virgo who has built her integrated mortgage and financial planning business, TV Financial, from scratch, said: “I think [people] are becoming more aware of their choices when it comes to asset allocations within their superannuation. They are able to make a lot more freedom decisions around ethically investing and with what aligns with them.

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“As an adviser, I remind people they have choice. As a financial planner it’s my duty of care to display to clients how they have a choice and options to have their investments ethically aligned with their own values.”

ETHICAL SCREENING

Andrew Gaston, dealer principal and senior adviser at Adelaide-based Accord Financial Solutions, who has a strong focus on responsible investing, said that an increasing number of his clients now demand ethical screening of the companies.

“It has changed a lot, probably over the last five years meaning that more people are now taking an interest, and thanks to the fact that it is in the media every day the level of knowledge has increased hugely.”

Although advisers said they had not seen the full impact the recent bushfires have had on their existing and prospective client base and their selection of investment strategies, they agreed that awareness was growing.

“People are making a very conscious decision about not investing with companies that put geographical locations in danger. I don’t know about whether it is linked directly 100% with climate change per se but people are being more aware about how their money is being invested and what choices they have around those investments,” Virgo said.

Although recent bushfires have contributed to growing environmental awareness among people and had an impact on many communities due to their proximity, there was no direct link to clients’ take on their investment strategies.

“In my region especially I don’t think there is a direct link between these activities and their investments. I think it’s more around the questions being asked on what we are doing about prevention, I don’t think you can link the bushfires to climate change myself, and from what I get from investors.”

Of a similar opinion was Gaston who said that it was too early to say whether the bushfires had triggered any responses in people, as at this stage the communities were more focused on what had happened, who was affected, and which charities they should be supporting. However, he expected more activity around portfolio reviews once the dust settled.

“It’s too early to say but it’s triggering people’s thought process. I expect that probably in a couple of months time when people had time to think back and then start to think about it, it will trigger a new wave,” he said.

Following that, the financial planning community would need to embrace this change by assisting people with enquiries and directing them to the relevant places such as the Responsible Investment Association which might be a good starting point both for enquiries from clients and advisers.

Gaston also said that advisers were being approached by a group of investment houses who claimed to be taking ESG considerations into account, however what they offered was “not as much of ESG” as the clients would wish to see.

“I would say that from the clients’ perspective – they [clients] have come a long way very quickly and they’ve left a lot of investment houses behind in the process,” he said.
Similarly, the new products coming to market would need to have much stronger screening, consistent with clients’ requirements. 

According to Accord Financial Solutions, the fund managers, in particular those who are relatively new or boutique, had already learnt to recognise that if they were not offering what the clients were asking for in their new products, or if they offered products similar to what was already in the market, they would not be able to attract strong fund flows.

Gaston also said that over the last couple of years there has been growing interest among his clients towards impact investing. 

“Therefore we are trying to talk to investment managers that specialise in that and have impact funds as clients that are going to take the next step,” he said.

THE BIG THREE

When it comes to clients’ take on the ESG considerations and responsible investments, most advisers admitted the individual understanding of their clients significantly varied across the board and would depend on a number of factors such as lifestyle, education, demographic, and place of residence. 

Gaston said that the big three things that matter the most for his clients, before getting to the other ethical concerns they may have, were: gaming, tobacco and fossil fuels. 

The other growing trend, according to Gaston, was that his clients are not only inquiring about the negative screening but are asking, more often than not, for the positive screening where given sectors and projects are being selected based on their positive ESG scores.

At the same time, Virgo said that her clients are more interested in renewable energy and being more efficient towards the way people operate now compared to previous years.

“Carbon footprint, reducing waste and clean energy – those are the types of things that we are seeing or I am seeing or having more conversations, if I relate it back to five years ago,” she said.

According to Roger Prince from Roger Prince & Associates, whose client base included mostly “ordinary Australians – mum and dad” investor types, and who are not necessarily actively pursuing financial market news, it all came down to avoiding investing in certain areas such as alcohol or gambling.

He said that his clients were happy if their portfolios remained profitable and had the best possible strategy in place.

“[The majority of my clients] are not actively pursuing the financial market news, they are doing their day-to-day lives, and the peace of mind that I am meeting their needs so they are really satisfied on that basis,” he said.