There is increasing recognition globally that responsible investing is integral to fiduciary duty which has important implications for financial advisers. We have reached a tipping point where the intersection of social license and regulatory action are underpinning a permanent change in the investment landscape.
Regulatory change from governments, industry bodies and global organisations is hard to unwind once it is established, and we are well down that path. But a lack of agreement on what responsible investing is brings its own challenges as well.
There are many roads to responsible investing (RI). But what is ‘good’ or ‘green’ in RI is very much in the eye of the beholder. The challenge therefore is how do advisers identify a client’s RI preferences and how can they action them in a systematic way?
While RI was traditionally centred around negative screening, it is now far more nuanced and while the investing waters are often muddied by a lack of consistent terminology, increasing regulation is attempting to cut through these issues.
Global regulations around RI are increasing and converging, and there is recognition amongst regulators that cross border harmonisation and inter-operability is important.
There has been a major focus on the development of global sustainability disclosure standards, fund labelling and mitigating greenwashing – and this focus will continue to gather pace.
What’s more, the continued development of standards in Europe, the UK and the US may foreshadow what the future ultimately looks like in other countries like Australia. For example, market participants in Europe are already required to disclose how they account for sustainability risks in decisions and products, with funds required to be classified based on the degree to which ESG and sustainability is a consideration.
Regulation is also increasingly capturing advisers, with developments across major markets moving to meaningfully emphasise and even change advice requirements regarding RI considerations.
ASIC has acknowledged that global harmonisation is desirable while taking into account local conditions. Australian advisers should actively consider the implications of a similar regulatory framework for their businesses.
Advisers have a vital role to play in helping clients understand what ‘good’ outcomes look like. What’s good looks different based on different asset classes and investment approaches. Investors need to understand how far they are prepared to go to pursue RI preferences and what outcomes they are prepared to accept.
There is no utopia, only compromises, as positive goals often come at a cost – including the understanding that to get to ‘green’, you might have to start by getting dirty in order to transition.
But ultimately, the role of the adviser is critical in helping clients stay the course.
It is important to recognise that the field of RI remains in its infancy and acceptance is far from uniform. With adoption still in an early phase, it will be tested when markets experience turmoil.
Like all investment concepts, RI strategies will exhibit periods where performance is challenged and it will be important for advisers to help clients understand what expected outcomes look like and why. The concept of ‘adviser alpha’ doesn’t just apply to the more traditional concepts of risk and return; it is also going to play a pivotal role in facilitating responsible investment preferences as well.