If fund flows into environmental, social and governance products is a proxy for investor interest, then the evidence is clear: Investors are keen. As of 30 Sept 2021, assets invested in Australasia-domiciled sustainable investments were up 73 per cent (YOY) to $38 billion.
While sustainable fund launches have slowed down this year, the product proliferation over the last few years has piqued the Australian Securities and Investment Commission’s interest.
However, the industry is nascent and inevitably some funds are overstating the ESG benefits available. It’s not surprising that ASIC is in the midst of a review to establish whether the ESG products are as green as they claim.
With the recent COP26 event in the headlines and greenwashing now firmly on ASIC’s radar, advisers need to carefully consider how to meet their clients’ expectations when it comes to ESG issues and their fiduciary obligations. It’s not easy.
In fact, FASEA’s Code of Ethics requires advisers to “actively consider the client’s broader long-term interests” and it demands products are recommended in good faith and with competence.
While Standard 6 in FASEA’s Code of Ethics is far from prescriptive, the FPA’s understanding is that advice processes should consider “ethical” or “responsible” investments. In the wake of the REST case (where a member took the fund to court for failing to protect his savings against climate change), advisers cannot simply dismiss ESG considerations as a passing fad.
Nor is there a clear-cut argument that incorporating ESG into portfolios lowers investment returns. Morningstar recently examined the return and risk characteristics of several global equities funds and concluded that there is little evidence that ESG-minded investors need to trade off investment results.
Advisers should consider how to incorporate ESG into their advice processes and, where appropriate, their investment solutions. But discerning a fund’s ESG capabilities is not an easy undertaking.
Getting the Metrics on ESG
The level of due diligence required to make ESG assessment is onerous. Analysts can spend days assessing the ESG-related information provided by fund managers and a meeting is necessary to deep-dive and clarify findings.
For advisers who are required to recommend funds in good faith and with competence (another FASEA requirement), it’s worth considering what type and level of analysis on an ESG fund is required to discharge that obligation. Is that analysis able to be supported by internal resources, or are your external investment partners adequately resourced to differentiate which funds are greenwashing and which aren’t?
Given the regulator’s focus in this area, these questions are worth considering.
Advisers now have a very important fiduciary duty to ensure they consider the client’s long-term interests and provide investment solutions in good faith and with competence. Therefore, it is crucial that advisers access the right tools to confidently guide their clients into appropriate investment solutions. Ultimately, these tools range from an adviser doing the work themselves, partnering to access research that assesses ESG products, or finding a holistic and diversified investment solution via a managed account or managed fund.
Wherever you land on this spectrum, clients deserve to be invested in accordance with their long-term interests and into ESG products that are as “green” as they claim.