In celebration of Money Week in NZ, Simon O’Connor, CEO Responsible Investment Association Australasia, just wonders if a focus on ESG could give financial advisers the edge in a world where values and value assume equal importance…
Amongst the uncertain times we find ourselves in, it’s no wonder the Commission For Financial Capability is telling us they are witnessing a flood of questions about money, and have aptly themed this year’s Sorted Money Week ‘Just Wondering’. In times like these, clients want to avoid risk, are inclined to rush to ‘safe’ assets, and want to be sure their money is being managed well.
So which investment approach can provide this for clients?
Despite COVID-19, responsible investment continues its forward march across financial services. At the start of this period, many would have been well within their rights to ask how responsible investment might hold up in what has been one of the greatest tests in markets for at least the last decade.
The lesson that most investors are taking from the ongoing COVID-19 pandemic is that responsible investors have navigated recent tumultuous markets much more strongly than those ignoring this trend.
Responsible investing – a term that incorporates approaches such as environmental, social and governance (ESG) integration, ethical and impact investment – now constitutes a major focus of New Zealand investors, with RIAA’s RI Benchmark Report showing the vast majority of the domestic market being managed through responsible investment approaches, a number that’s been steadily increasing each year.
The reasons for this strong growth are well worth financial advisers paying close attention to.
A growing weight of evidence is demonstrating that responsible investment products have maintained frequently stronger risk-adjusted performance when analysed against their peers, consistently outperforming against the benchmark over short- and long-term time frames.
BlackRock, the world’s largest asset manager, reported in May a finding of “better risk-adjusted performance across sustainable products globally, with 94 per cent of a globally-representative selection of widely-analysed sustainable indices outperforming their parent benchmarks”.
Similarly, analysis by AXA Investment Managers found unequivocally that companies with higher ESG rankings have proven themselves to be more resilient through COVID, have outperformed the benchmark, and have “left the ESG laggards for dead”.
This has come at a time when New Zealanders are increasingly seeking out responsible and ethical investment options.
Consumer research undertaken by RIAA together with Mindful Money reveal the extent of this with over 80 per cent of New Zealanders now expecting their investments to be invested responsibly and ethically, and most are willing to act on it – two thirds say they would consider moving their money if it was invested in a manner inconsistent with their values.
The research also highlights a warning to financial advisers, with six in 10 New Zealanders saying it’s important their adviser is knowledgeable about responsible investment options.
On top of this performance and growing demand, the financial sector regulatory regime globally and in New Zealand is increasingly requiring sustainability, ESG factors and climate change risk management to be a core part of basic compliance for investors.
Moves are afoot and accelerating, with the Financial Markets Authority (FMA) set to develop guidance for responsible investments, the Ministry of Business, Innovation and Employment requiring responsible investment to be embedded by all default KiwiSaver providers, and legislation imminent that will require climate related financial disclosures across New Zealand businesses.
The work of the New Zealand Sustainable Finance Forum will only accelerate this move, as that initiative, set to report in late 2020, will again amplify the need for finance to play a role in ‘greening finance’ and ‘financing green’.
If we look offshore, what could this mean for financial advisers? The EU is moving ahead to require advisers to understand the sustainability and ethical preferences of their clients to deliver on this duty of care. And Australia has a requirement to consider the broader long-term interests of clients under the FASEA Code, which it states may require advisers to have access to responsible investment products.
The good news is that a good diverse set of responsible investment solutions are today available. RIAA’s own RI Certification Program, the world’s longest running certification scheme for responsible investment products, sets the highest bar of scrutiny on investment products, ensuring they are delivering on their promise. It then communicates the differences in products to investors and advisers via the Responsible Returns online tool.
All of this is resulting in a growing momentum by leading financial advisers to incorporate responsible investment solutions into their offerings, with an emergence of ESG model portfolios, responsible investment products on approved product lists and platforms, and deeper expertise being developed within leading firms to better serve the growing client demand.
In a world where robots and algorithms can set and invest for any client, the financial advisers who will distinguish themselves are those who can invest their clients’ nest eggs in a manner that meets both their investment goals and aligns with their life purpose and values.
So when your client next comes in to ‘just wonder’ about their ability to have a comfortable retirement, you may want to ensure you’re ready to talk responsible investment.
The Responsible Investment Association Australasia is holding its annual conference across the week of the 15th September, including a free online session to help financial advisers navigate responsible investment on Fri 18th September – find out more here.
