Two key tips to avoid greenwashing and shape your client conversations on ESG

Ethical investing might be one of the strongest investment trends of recent time, but the evolution of the sector has resulted in a confusing array of investment strategies, anacronyms and terms.

FCA regulation and best practice requires financial advisers to provide investment advice that is clear, relevant and suitable. However, the complex nature of the sector makes it difficult for financial advisers to compare funds on a like for like basis and select portfolios that align with each client’s individual values.

Tip 1 - don’t let perfect be the enemy of good"

The growth in the number of companies that are promoting their sustainability credentials has also given rise to accusations of greenwashing. This isn’t helped by the lack of clarity within the ESG investment sector and grey areas around definitions. The worry for advisers is that this could leave them open to claims of mis-selling. For example, they may position an investment as one thing, only for it to change or not be run as initially claimed.

The world is an imperfect place and how you frame your recommended investment can help to bridge the gap between client expectations and the reality of a fast moving and complex world. Being transparent and managing client expectations on what is achievable can provide room for manoeuvre when the world changes, or the perception of the world changes.

If a client expects a portfolio to be carbon neutral but it transpires that it this is not the case, then the client will feel they have been misled. But take a company with a high carbon footprint; on one hand carbon emissions are bad, but if that company operates a fleet of buses that help take cars off the road, it could still be making a positive environmental contribution overall. It can be ok to not be perfect if an investment is contributing to better environmental or social outcomes or if a company is making progress to improve.

It is important that the intentions of the investment recommendation allow for the imperfections of the world and its complexity.

Tip 2 - focus on the things that really matter"

Framing the investment solution to allow for sufficient flexibility in its stated intentions, and changes in external circumstances, is an important first step in the advice process. The next step is to establish a set of principles that build upon your intentions but are sufficiently pragmatic about the trade offs required to deliver a responsible investment portfolio.

We believe this can be done by focusing on the wider responsible investment issues that really matter to clients. Clients aren’t interested in ethical investment jargon or the technical differences between SRI, ESG and impact investing strategies. It’s the real-world issues they care about, like tackling the climate crisis and avoiding unethical behaviour. It’s therefore important you find out what your clients are passionate about, is it deforestation, labour practices, equality or something else?

Responsible investing that’s grounded in the real world

At FE Investments, we believe pragmatism and flexibility are key components of a responsible investment solution. Our Responsibly Managed Portfolios focus on three simple core principles that are easy to explain and that clients can understand.

Do more good
Do less harm
Deliver on risk and return

We know how important it is to communicate clearly with clients for the success of your business. Our enhanced portfolio reports are designed to show clients the harm they have avoided and the good that has been accomplished by investing in our Responsibly Managed Portfolios. The data is broken down by key responsible investment categories, such as environmental, social, governance and controversial industries.

We also recognise that in a complex world no responsible investment can be perfect and there will always be some concerns around underlying investments. Our reporting includes the key data for each of the underlying funds so you have the information available that can help you explain to clients why their portfolios may hold a certain position, when the underlying company does not initially appear to be a sustainable investment.

Launched back in 2017 when ESG solutions from discretionary managed portfolio providers were in their infancy, our Responsibly Managed range has the three-year performance data that’s so important for adviser analysis.

Designed with financial advisers in mind, the range caters for investors with differing risk profiles and time horizons. It includes a choice of 15 portfolios – with five risk-optimised portfolios each spanning three investment time horizons.

Click here to learn more about the Responsibly Managed Portfolios or get in touch via the link below to request our client guide and speak to one of our experts.

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Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and you may not get back the amount originally invested.