Who is responsible for educating investors about ESG?

By TIMOTHY RANGONGO Editor: MoneyMarketing

Investors are becoming increasingly concerned about questions of sustainability and equity. There is growing interest in Environmental, Social and Governance (ESG) related investing, especially post-COP26. The approach, however, is still fairly new and undefined. BlackRock CEO Larry Fink recently prodded shareholders and governments for action. In his annual letter to CEOs, he said governments should offer more guidance on sustainability policy, regulation and disclosure across markets.

Across the globe, financial literacy is already an ongoing challenge. Add to this teaching people about sustainable investment, and how they could integrate it into their investment portfolios or consider different ways to align their investments with personal values – and it becomes even more challenging.

It is a deep challenge, and there is no taxonomy agreed upon, says Michael Young, manager of education programmes at the Forum for Sustainable and Responsible Investment on ESG education. Though Young, like Fink, mentions governmental structures as critical to disseminating ESG education, he says it ultimately has to come from asset managers and financial service providers, too; firms that offer ESG-related products. “When selling an investment product to a client, we are entering into a longterm relationship with our client. It is fundamental that we build trust between ourselves, in terms of understanding each other’s expectations and what we can deliver to each other; and not just for ESG but investments generally,” says Brunno Maradei, global head of responsible

investment at Aegon Asset Management. When selling a fund to a client, among some of Maradei’s targets are ensuring that the fund meets its risk-return expectations, including the client’s preferences. He gets into details with clients about what they want to achieve with their capital, what their ESG objectives and sustainability risk tolerances are. This discussion includes having realistic expectations of what can be delivered.

The early stages of ESG investing also coincide with the trillion-dollartransfer of intergenerational wealth. But, numerous studies cite some disconnect between financial advisers and the inheriting generation: the millennials, who are also in their prime earning years and more inclined to invest in ESG.

There are questions of whether there is any need for education, especially for this demographic of 25- to 40-year-olds – and if there is, how it is delivered. Should consultations continue the same way as previous generations of investors, or is there a need for different ways to accommodate this group’s different perspectives?

“Financial advisers and asset managers have to be flexible. Can the education be delivered the same way across the board? I don’t think so. The world has changed so much,” says Young.

Michael Young, Manager of Education Programs, The Forum for Sustainable and Responsible Investment

Firms typically lose 70% to 80% of assets when transferred from one generation to the next, according to a 2019 report by Julian Seelan, sustainable investing lead for wealth and asset management clients at Ernst & Young. The demand for sustainable investments is also being driven, in part, by millennials who prefer to invest in alignment with personal values, it adds.

“So, it would be crazy for a firm to not spend its time trying to create educational profiles – not only to help the client, and in particular a millennial client, understand what is possible,” says Young.

He adds that this engagement is also an opportunity for the firm to show off its capabilities – that they have been investing resources (including human capital) and time into building the types of platforms that deliver what an investor with a real focus on sustainable investment would like to see.

“There is also no one way to teach everybody everything. Some people prefer to work with financial advisers, while some prefer robo-advisers or DIY. In a nutshell, you have got to be able to do different things for different generations of people,” says Young.

Financial adviser education

In terms of good fund management, Maradei says it is irresponsible of a financial adviser not to be looking at ESG. He considers it a breach of fiduciary duty to not be looking at material environmental, social and governance issues, especially when making a longterm investment.

“If a client is putting their pension fund with me and they are 40 years old, planning to retire in 25 years, and I am not looking at the impact of climate change on their portfolio, I am in breach of my fiduciary duty,” he says.

Discussions about environmental, social and governance issues that may pose risks to their portfolio or opportunities, in some cases, is key. Some clients may only be interested in maximising return and not sustainability opportunities, to which he says they can still be steered away from the more specialised range of sustainability products.

“Overall, the importance to bear in mind is that ESG investors are not a homogenous group; even millennials are not a homogenous group. Everybody has different objectives when it comes to ESG.”

In Maradei’s experience, some use ESG to maximise financial returns, while others use it to minimise risk. Others want to use it to reduce reputational risk – to maximise what some call the ‘feel-good factor’ – and others want to achieve real-world impact.

“ESG can do all of that, but ESG is a catch-all term, and one needs to dig a lot deeper to get behind what the expectation of the client is, and what they want to achieve with their investment portfolio when it comes to ESG.”

Brunno Maradei, Global Head of Responsible Investment, Aegon Asset Management