The degree and application of the ESG overlay will affect the extent of the portfolio bias. Therefore the approach adopted by the adviser and dealer group in implementing ESG principles needs to be considered in light of the potential portfolio implications.
IMPLEMENTING ESG
The following steps can provide guidance for an adviser and dealer group looking to implement the ESG principles as part of their business and proposition to clients.
• Determining the ESG principles: Discuss and agree on the approach to the ESG screens and the actual ESG principles under each category. Importantly, consider the extent to which ESG screens may be applied and any metrics to be applied to each screen.
• Service providers: Determine which service providers that are dealt with by the adviser and dealer group incorporate ESG considerations. This particularly applies to stockbrokers who provide share recommendations and research houses that assess managed funds. It is important to also consider what approach is used by these service providers in their application of ESG principles, to determine whether they fit with the principles adopted by the adviser and dealer group.
• ESG analysis: Determine how the ESG analysis will be conducted on the potential investments. This may be an overlay service provided by stockbrokers or by specialist groups that provide ESG ratings.
• Voting rights: Exercise voting rights for direct shares in line with ESG principles. The assessment may be conducted internally or out-sourced to a service provider.
• Communication and education: Provide education and communication material to clients, internal staff and advisers on the ESG principles, the screening approach and how the principles are implemented.
• Reporting: Put in place processes for disclosing the ESG principles and how they have been applied, including in the determination of voting decisions. Reporting can be provided via the adviser’s website or as part of a special report.
Implementing ESG principles as part of an adviser and dealer group’s processes allows advisers to meet the broader preferences of clients and can be a means of differentiating the value proposition provided by the adviser.
Assyat David is a director of Strategy Steps – www.strategysteps.com.au
