How are rising ESG interests changing wealth management

Climate change is one of the biggest challenges we face. While policies like the Paris Agreement attempt to change the world to have a net-zero emissions impact, there are still billions of dollars invested each year into harmful industries, such as fossil fuels. As pressure on climate change rises, could firms start to focus more on ESG funds?

This year alone has seen several devastating natural disasters. Whether it is the forest fires in California, floods in Germany, the Netherlands and Belgium or heatwaves in Canada, the effects of climate change seem to be happening more frequently. Scientists have warned these types of occurrences are only going to become more frequent if more effort is not taken to reverse climate change.

Governments around the world are taking measures to transform their countries’ operations to become less harmful to the environment. However, it is not as simple as flipping a switch. Transition away from certain energy sources will take time and a lot of money, but a lot of money is still being pumped into harmful energy. A report from Rainforest Action Network states the world’s 60 biggest banks have financed $3.8trn into fossil fuels over the past five years. Wealth management firms are also still heavily invested into these assets. The world’s top three asset managers, BlackRock, State Street and Vanguard, manage $300bn in fossil fuel investments, according to a report by The Guardian.

However, many banks are trying to change their operations and have green strategies in place. For example, Lloyd’s Banking Group is hoping to reduce the carbon emissions it finances by over 50% by 2030. While challenger bank Bunq plants trees for every €100 spent by a consumer. Many wealth managers are also part of this shift, with more and more offering ESG-focused funds. This strategy-shift is having an impact on the public. Kidbrooke CEO Fredrik Daveus said, “[Interest into green portfolios has risen] A lot, also fuelled by some financial institutions really making it their core marketing message. However, I still think there is a lingering idea with investors that anything sustainable will sacrifice investment returns.”

While there is a colossal amount of money still going to fossil fuels, interest in environment-positive investments have grown over the past few years. As the effects of climate change become more apparent, more people are shifting their lifestyle habits. One method of reducing their carbon footprint is by backing ESG funds. Analysis from Bloomberg found that global ESG assets under management are expected to reach $53trn by 2025. While CNBC recently reported that money invested into ESG funds more than doubled in 2020.

Sugi CEO and founder Josh Gregory said, “Interest in ESG investing has grown significantly to reflect the increased urgency of the climate crisis. Global flows into ESG funds topped US $178bn in the first quarter of this year, up from US $38bn in the same period last year, and on average two new ESG funds are launched each day. While private finance has the potential to make a real difference to climate outcomes, this will only happen if investors can make informed decisions.”

Echoing a similar sentiment is TietoEVRY head of insurance and wealth solutions Sameer Datye. He said, “ESG driven investment choices are seeing a rising popularity in the Nordic region. Overall, the society is very aware and sensitive of ethical business practices and takes pride in being at the forefront of this revolution. However, not all financial institutions have the choices available easily and obviously yet. However, the customer pressure is certainly mounting.” Datye continued to state that while not every financial institution is mature with an ethical portfolio, he is not aware of an organisation that does not have the project work to meet the need in their technology stack.

Green investment portfolios are becoming more available to retail investors. A number of WealthTech companies have started to offer a selection of portfolios designed to meet the customer’s interests, with the environmental impact being a common concern. UK-based digital investing app Moneyfarm recently launched its own socially responsible investing portfolios, enabling investors to pick portfolios that cover a variety of topics, including climate change, working conditions, corruption and more.

There are also several FinTech companies cropping up that exclusively focus on these types of ethics. Clim8 Invest is exclusively focused on the environment, enabling people to create a portfolio of companies operating in clean energy, clean technology, smart mobility, clean water, sustainable food and recycling.

However, with so many options available, it is easy for consumers to be overwhelmed and pick the wrong option. Gregory said, “When it comes to green and ethical investing, there’s more choice than ever. But this makes things very confusing for everyday investors. Greenwashing is also a serious issue, with limited regulation around using ESG labelling for investment products. So, while the majority of investors want their investments to have a positive impact, few follow through. This is what led me to create Sugi – providing personalised, understandable, relevant information so everyone can understand the impact of their investments and feel confident to make greener choices when managing their portfolios.”

Gregory continued to state that investment firms, both traditional firms and FinTechs, have started to launch new ESG funds and rebrand several existing vehicles. There have also been other options created, including low-carbon ETFs and “climate solutions” funds, which back businesses building solutions to combat climate change.

Another WealthTech company to have seen an increased appetite for ESG investing is WealthObjects, a digital robo and hybrid advice solution developer. WealthObjects CEO and founder Uday Nimmakayala explained how advisors have increasingly discussed ESG questionnaires and the best way of implementing them within their planning processes.

Nimmakayala said, “In the short term, we believe ESG consideration in the planning process will be a differentiating factor for Advisers, and in the medium term, it will become the norm. Regulations requiring the investments to be displayed with the ESG characteristics will lead to an exciting trend of ESG/Sustainable portfolios replacing and becoming the Standard Portfolios themselves. ESG becoming a norm is great news for society at large.”

Will there be regulation

As efforts to counter climate change continue to rise, regulations could be placed to ensure wealth managers offer more green portfolios. The UK government recently released a new green taxonomy, which is designed to provide better data on the environmental impact of firms. These measures will classify green activities and reveal climate-related risks.

Other ESG-focused regulations are starting to crop up around the world. The European Union is currently proposing a new Sustainable Finance Disclosure Regulation. This would require financial market participants to incorporate sustainability risks in their investment decision-making and advisory processes.

In Japan, a panel was established by the Financial Services Agency with the aim to boost investment into Japanese firms that support the carbon-neutral transition. One of the recommendations made was that institutional investors should enhance ESG investments and investee engagement to ensure capital market functions promote sustainable finance. Another suggestion was for asset managers to carefully explain characteristics of an ESG-related investment trust at its creation and be accountable in the area on an ongoing basis with the FSA.

However, more regulations might not be the key to ensuring firms offer more ESG portfolios. Daveus said, “Regulation is already happening with the requirements to report on ESG scores for investment products. Not sure if even more regulation would be an answer.”

The impact on the future

As appetite for these types of funds increases, it poses the subject of how the success of an investment firm could be tied with offering ESG portfolios. Daveus said, “I think it is an overall trend that will continue to grow as long as the debate on climate change is as active as it is today. It will probably simply merge into the mainstream where only more or less sustainable investment products will remain.” An example given is investment into electric cars if they become the norm and the only cars available for sale.

Gregory added, “Climate change is a clear risk for many organisations, and those who are not addressing this risk may struggle in the long term. It’s critical that ESG portfolios offered by investment firms actually deliver positive climate action instead of superficially exploiting a current trend.”

When questioned on whether a shift in investor appetite for ESG-focused portfolios could encourage more investors to move away from funds with investments into companies harmful to the environment, Gregory said, “Unfortunately, it’s not easy to identify investments that are harmful to the environment – and much depends on your own perspective. A good example is holding shares in ‘transition’ companies. These are companies, typically in polluting sectors, working hard to decarbonise their activities. They might have a high carbon impact now, but without ongoing financing and other shareholder support they could struggle to achieve their net zero commitments.

“Another example is climate solutions companies. While these companies help others to reduce their carbon emissions (e.g. through manufacturing wind turbines or producing components for electric cars), their own carbon footprint might be relatively high. It’s only through access to the right information that investors can make informed choices and invest in a way that aligns with their values.”

Speaking on the same question, Daveus echoed a similar response on the difficulty of knowing the impact companies have. He said, “Yes I think [it will cause a change], at least superficially as it is still very difficult to measure/know what is actually harmful to the environment or not, especially considering all aspects of a company’s product and services.”

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