- Paul Richards, Head of Distribution, Fidelity Adviser Solutions
- Julia Dreblow, Director, SRI Services
- Lee Coates, Co-founder, ESG Accord
Paul Richards: Good morning, everybody, and thank you for joining us for the latest webinar, which is about the subject of sustainable investing. Now, clearly, this is a really big topic in more ways than one. It's something which has dominated the political and regulatory agenda for some time and with good reason. It's about many things but, I guess, at its most fundamental level, it’s about making the world a better place to live and work but also, ultimately, about the survival of our species on this planet.
Asset management and the financial services industry in general, given its position as custodian of trillions of pounds of client assets, is uniquely placed to drive change in this area. But while change is happening, it's not moving perhaps as quickly as the regulators and politicians would like. We know that, despite efforts to make sustainable investing more visible and available, levels of interest and engagement have diminished amongst investors and that's evident from the fact that the ESG sector is currently in redemption with record outflows being reported recently.
So, we're keen to get the sustainable investing agenda back in the forefront and to help advisers do the same and joining me today to discuss this really quite complex area are two people who live and breathe the subject. I'm delighted to welcome Julia Dreblow, of SRI Services, and Lee Coates, of ESG Accord. So, welcome, both and thank you for joining me today.
Is sustainable investment still relevant given the current economic backdrop? (01.30)
Now we've got lots of questions to get through and lots of fairly detailed and complex ones. But I'm just going start with you, Julia, with a pretty fundamental question, and there's an element of devil's advocate in this, of course, but with everything that's going on in the world – we've heard this morning inflation has stayed stable and it looks like interest rates are going to go up again tomorrow, so we've got not exactly record rates of interest but higher rates of interest and people are struggling with energy bills, food bills, etc., etc, etc. – have people actually got more important things to worry about than whether their portfolio is sustainable or not?
Julia Dreblow: Devil's advocate, Paul, but also a fair question! So, I guess there's two sides to this. One is, in many ways, yes. There are lots of problems, lots of things at the moment that are really troubling people. So, we've got to acknowledge that – it would be ridiculous to pretend it wasn't really important. But the bottom line is, as you alluded to in your introduction, sustainability is a far bigger issue than the issues we face today. It is really, really important. You think the crises that are starting to hit increasingly, if we don't deal with things like climate change, will just make today's issues look like child’s play. So, I think a lot of people do recognise that and people have got money invested and will still keep making investment in their pensions, ISAs and whatever. So, I think basically the answer is yes on both counts and somewhere in between the two.
Paul Richards: Lee, you're nodding. Do you have any thoughts on that one?
Lee Coates: Only to say that if you take your question to the nth degree, then these unfortunate – let's call it that – situations, you know, the cost of living, Russia going into Ukraine, etc., then they would trigger the ending of financial advice until everything goes back to roses blooming in the garden state. It's got nothing to do with having a sustainable portfolio, it’s about receiving advice and advice that's appropriate to the needs of the client and unless you're investing entirely in cash, you're then taking a long-term view. If you’re taking a long-term view, what's happening today is of note but not relevant to a long-term plan.
Fund flows (03.45)
Paul Richards: So, why do you think investors are pulling money out of the ESG sector?
Julia Dreblow: I was just going to add, actually, I haven't realised until quite recently – we had this, I think, from a journalist – apparently the outflows we're actually one big shift in one fund that basically was recreated as another fund elsewhere. It was one big dollop of cash. It's not about flows, it was something like 8 billion or something ridiculous.
Lee Coates: Recycling.
Julia Dreblow: So, yes, so the outflows are massively overstated from what I'm hearing. Yes, interest has calm down a bit but, let's face it, people aren't really that interested in investment at the moment for the reasons you're saying.
Paul Richards: Yes, I guess there’s a general issue in that regard. Thanks for that.
ESG and sustainability – are they the same? (04.35)
Paul Richards: As a starter, I'm going to throw a few quickfire questions at you before we get into some of the detailed stuff, if that's okay. So, this is the sort of quickfire round. These are questions which I often hear from advisers when I'm going around the country talking to them. The most basic one is the label “sustainability”. Is this the same as ESG? What's the difference?
Lee Coates: No. Next question!
Julia Dreblow: So, sustainability – forward looking, worrying about what's happening in the future, aligning your investments to future winners, and solving problems. ESG – managing the risk within your portfolio, doesn't necessarily matter to you what the company does so long as they are managing the risks as well as they can, they’ve got the right people on the board and all that kind of thing, so internally focused, externally focused, looking at just today, looking at the future. And sustainability obviously makes sense because we invest for the future. So that's certainly where my interest is.
Sustainable funds and performance (05.36)
Paul Richards: Okay, the next quick one is an old chestnut, which I often hear from advisers, and is about if I buy sustainable funds then I'm going to sacrifice something, and that's actually going to be performance. What's the truth in that one?
Julia Dreblow: How about a stopped clock is right twice a day?! I've been hearing that for 30 years, and actually these funds have done mostly really well. But every now and then they do badly like when oil companies do really well, because, funnily enough, they don't invest in them that much because they are deeply unsustainable. So, yes, of course they're going to be times, any type of fund is going to have good and bad phases. But no, absolutely not. It's the complete polar opposite. If you fail to consider sustainability issues, your fund will run into trouble.
Lee Coates: Yes, and I would say that, if there’s anything, there’s more likely to be potentially greater volatility rather than under performance. It depends on how discreet your timeline is, and if you want to go to discrete, you could say the end of oil investment at all, forever, if you take those short periods, was sort of 2018, 2019, 2020, and then Russia goes into Ukraine and suddenly oil is king. If you're taking long-term views, short-term discrepancies in particular sectors certainly shouldn't be a basis for completely realigning portfolios because otherwise you’re then running a portfolio on the basis of what happened yesterday, not where we are going.
Active versus passive (07.06)
Paul Richards: Okay, thanks. The next question is one of active management. I work for Fidelity and at its heart it’s an active manager but Fidelity do manufacture passive funds as well. So, the question is, is active management the only effectively way to deal with sustainable portfolios or does conventional index tracking still have a role to play?
Lee Coates: I would say it depends on what the client is actually trying to achieve. So, if the client is saying ‘yes, I would like to build some form of sustainability in but I don't want to get too involved in the process’, then using a passive fund which tracks a sustainable index is a good idea. There are no claims about it achieving anything, there are no claims about engagement going on – it's difficult to engage within an index because you're then manipulating the index by trying to change the company.
Paul Richards: Yes, I guess what I was getting at really was we're still seeing millions of pounds going into conventional FTSE trackers, All-Share trackers, S&P 500 trackers. So that's really what I was thinking.
Julia Dreblow: Yes. Look, I would never write off trackers just because they’ve been so successful. But the heart of sustainable investment is actually thinking about sustainability issues and understanding things and crafting a fund around a set of words that someone can put in front of their clients so that this is the kind of assets we're looking to invest in, you're getting eye contact with the managers of companies, with the CEOs of big companies, and understanding where they're thinking going forward. That doesn't lend itself too well to data, right? There may be a time when data improves and, of course, data has a big role to play. But realistically, right now, this is something that people are struggling to get their heads around. You want someone thinking about it. It's not about an algorithm or just a whole bunch of stocks that are the same. So, it really does lend itself to active, definitely, because you need people thinking.
Lee Coates: Yes, I would also say, just as a comparison. If you're then comparing conventional index funds with, let's say, a sustainably actively-managed sustainable portfolio, then you're looking at two different degrees of risk. One is about managing future risk and one is about managing the risk of an exit strategy from conventional investment models. So, if you think about it, the last people to exit the last oil company will be those invested in index trackers because they'll follow it through the index until it pops out at the end, whilst all the active managers will have ditched a long time ago. That's a ditching process down the index and out the other end. But the last people hanging on to oil will be everybody in the conventional index tracker.
Oil stocks and sustainable funds (10.08)
Paul Richards: Well, that's a perfect segue into the final question in this section, which is whether an oil stock actually can ever feature in a sustainable fund?
Julia Dreblow: So, many of us here are deeply entrenched in this area and care a whole load about it and would very often say no. A deeply unsustainable strategy – what they actually do as a business is causing the problem of climate change. So, the difference between trackers and active, we actually look at what companies do rather than just how they rate on some different metrics. But what we've done with the SDR is to wrap our arms around the fact that, yes, we know there are actually a whole lot of strategies that do invest in hugely problematic companies like fossil fuel companies. We know they're not going to go away. So, let's allow them to be under the improver label, providing they can prove that they're on a transition path to Net Zero and are actually doing good things, and are moving in the right direction because, ultimately, that's what needs to happen. We've got to move everybody in the right direction. So, if we just kick them out of the tent, then they no longer part of that conversation, and that's problematic. But what we need to do is to make sure that if the fund is likely to have an oil company in it, that the client knows about that, and they're going in there with their eyes open, and that they're well aware that there's going to be exposure to stocks that many people would like to avoid. However, if they want to invest in them, that's absolutely fine. So, this comes down to transparency and disclosure and all the good things that the SDR is all about.
Lee Coates: Yes, I would just add to that, from an IFA’s perspective, it's all about assumption management, as I call it. And that is the adviser needs to manage the assumptions the client might make. So, if they’re buying a sustainable fund, the client might assume that it would never have fossil fuels in it, so managing that by saying, actually, there's a difference when the SDR comes in – the sustainable improvers, which could be about making the current bad companies better, or sustainable focus, which is 100% percent focused on sustainable solutions, and having that conversation with the client. So, managing assumptions. If it's just ‘oh, you want sustainability’, ‘yes’, ‘there's lots of improver funds, I’ll put the client in there’, that isn't managing the potential risk of a ‘why are there oil stocks in my sustainable fund?’.
Julia Dreblow: I love that phrase, Lee. I haven’t heard you say that before. So, assumption management is absolutely perfect and that gets right to the heart of what advisers need to think about here. There’s a grey area in the middle. So, this is companies that supply the oil and gas chain, supply them with widgets or whatever, there’s the utility companies that are using the energy that's come from coal, oil and gas because they’re part of the system. So, be aware that within those assumptions you've got to dig a little bit deeper, because there's going be a lot of stocks where some people are going to say, ‘yes, that's fine’, but realistically they can't do anything different, it's just business, we're trying to encourage progress. But they are part of the chain while others will be more purist and so will want to stay well away. So, you’ve got to find out what the client wants.
Lee Coates: A very brief anecdote that will reinforce this and bring us back to the other questions you had earlier which is active versus passive. I remember a story once where a sustainable fund said, “no, we don't invest in oil and fossil fuel companies, but we do invest sometimes in companies that support them” and they gave the example of a company that makes accommodation on oil rigs, and made the comparison between, especially in the Gulf of Mexico, workers helicoptered in and out every day to work, which has an environmental impact, as well as working on the oil rig. So, having them stay there for perhaps a week in accommodation, nice accommodation, reduces the carbon impact of operating the oil rig, and you have to get your head around that. So, these other businesses, some of them can have a positive environmental impact because of what they do. And if oil isn't going to go away tomorrow, then we need to make sure oil is produced or phased out in the most sustainable way possible. That's just a practical example.
Julia Dreblow: I think we've run the risk of scaring people here, but just genuinely try and get the idea of how purest someone is and are they willing to understand that there are companies in the supply chain that can still be doing good things?
Paul Richards: And I guess, for asset managers, that’s a fundamental challenge, isn't it? Because if I were an asset manager running a UK growth portfolio, to an extent I've got my hands tied given the benchmark I’m targeted to beat. So, it's almost self-fulfilling, isn't it?
Regulation and the SDR requirements (15.08)
Paul Richards: Right, let's get to some of these more detailed questions. And, Julia, you've touched on some of the things we're going to talk about already. I mentioned regulation in the introduction, so could you give us a brief summary on where we are now exactly in terms of regulation? I'm particularly thinking about the SDR – the Sustainability Disclosure Requirements – which you touched upon earlier, Julia. And what does this mean specifically for our advisers who are on this call and how is the asset management sector addressing these new labels which you touched upon earlier?
Julia Dreblow: Briefly, the FCA is still working on this – I've got another call with the FCA tomorrow – but the bottom line is that this is complicated stuff and getting it right is proving really hard, because we know that clients have landed up in funds that don't do what they wanted. So, we know there's a mis-selling issue here and they've got to address that. And we know that there's all these different strategies that can help in different ways. So, there are things around the percentages and how we treat portfolios and exactly what the rules are for the specific labels, but that getting this right will have pretty big implications for quite a lot of investors.
Paul Richards: Can I just stop you there because you used a word there which is which quite strong – mis-selling – and I'm sure there are many advisers on the call whose ears pricked up because that has connotations of all sorts of nasty things. Can you expand on what you mean there?
Julia Dreblow: Yes. So, if you look at the way the SDR paper was initially announced, it all talked about greenwashing. And that's basically companies overstating what they do. And I always add – on the environmental side or sustainability side – the bit to the end of that ‘for financial gain’. People are doing it because it's profitable to over-egg what you do. They're not doing it just for a laugh. So, we know that intermediaries have had all this information pushed out to them that has raised the expectations above and beyond where they should realistically have been. It's not to say they're inappropriate for the clients that are in them but there will be clients in there that are problematic. So, we are going to have to find ways of communicating these funds more precisely and effectively, which is why disclosure and labels are going to help, to make sure that the right people are in the right funds. Now, we've talked about this stuff for a long time, Lee and I, but realistically, if people don't understand what clients want, how on earth can they possibly get them in the right fund? So yes, there’s massive mis-selling risks, which is why I hope one of the things that will come through on this session is get closer to your clients, understand what they want. But, by the same token, recognise this as an opportunity. This is something that advisers can do that, frankly, an algorithm can't – get to understand what's in someone's heart and mind. So, it's a massive opportunity but we do have to be really careful in this area now.
Lee Coates: Yes, I would say that it's the perfect environment – excuse the pun – for financial advice. As Julia said, the algorithm, buying direct, buying off a chatbot isn't going to deliver good outcomes if a client is at all interested. So, by the financial advice industry embracing the delivery of, as we know it under Consumer Duty, good client outcomes, that looking at ESG and sustainability is one of the great drivers, I think, for delivering advice. Anybody can build a portfolio based on passive – anybody as in any computer can build a portfolio of passives, building an ethical, sustainable, UNSDG impact-based portfolio really is only going to come from a financial adviser. So, back to the Consumer Duty again – fair value – an adviser is delivering fair value by talking about ESG and sustainability. Forget the legal obligations on them that they actually have to ask the questions, they're actually demonstrating how good they are at what they do by raising the questions and demonstrating to the client that they're worth the money that they're being paid because they talk about this, because otherwise, yes, if you just want to know where to go and stick money in your ISA, just go and buy a portfolio of passives from a bot online.
Julia Dreblow: And I would add to that. Advisers, please get on this sooner rather than later. I feel quite sure there will be plenty of ambulance chases coming along once SDR goes live.
Lee Coates: Yes, get on to it before the 31st July, because under the Consumer Duty obligations, you have to make sure clients are making an informed choice. In order to make an informed choice, clients have to be aware. So, even little things like “oh, yes, we ask the ESG question on the fact find” – that's not compliant with the Consumer Duty.
Sustainable investing and the Consumer Duty (20.10)
Paul Richards: This was going be my next question. You've touched upon some of the aspects, you touched upon fair value. Let's get into a bit of detail about that, because I know you at ESG Accord have done a lot of work in this area. I have a lot of sympathy for our advisers on this call, because they've had a lot thrown at them over recent months, notably Consumer Duty, so specifically what other obligations in the context of sustainability exist as a result of Consumer Duty?
Lee Coates: Well, I'd flip that question around a bit. Firstly, look at SDR. When SDR comes in, it'll be a rule that sits under Consumer Duty. So, getting Consumer Duty right makes SDR really simple and SDR delivers fund labels and anti-greenwashing so that sort of makes life even easier for advisers. So, getting Consumer Duty right, and we look at one aspect of it, one particular aspect which is delivering good outcomes via informed choice and understanding client investment preferences and objectives. So, a client can't make an informed choice if you simply go through a fact find. What's the name of your dog? What's the name of your kids? How old? How much money have you got? Oh, do you want ESG? What’s ESG? No time to discuss that, do you want it or not? That's not an informed choice. That's a client being pressured into a no answer, although there was no overt pressure. Of course, with most people, if you ask a question, and it's a binary yes or no, and you don't know what it means, you won't go, ‘oh, yes, I'll have some of that. I don't understand’. They'll say, ‘no, I don't want this thing that I don't understand’. So, informed choices, what is ESG and sustainable? What is conventional? So, we look at the spectrum of capital.
A part of informed choice will be saying to clients, don't look at ESG as separate. Look at ESG, sustainable, conventional investment the way it's always been done. If you understand how it all works – and FCA research backs that up – the clients understand that they do or don't want sustainability when they know how it fits with everything else. So, make sure clients are making an informed choice, give them some educational material about the options, and then possibly most people will then make that decision. That's all very well for people that want to do sustainability, glad I know about it, not for me, carry on conventional.
So, there's informed choice, but understanding their investment preferences and objectives means understanding what they want to do with their money. Or rather the how. So, the ‘what have you got to invest and what am I going to recommend?’ – that’s the ‘what’ question. ‘How would you like that money invested?’ is a ‘how’ question and that's how would you like it invested and have you got any investment preferences and objectives that you want to build in? ‘Well, I don't know, what does that mean?’ That comes back to, ‘well, to make an informed choice, you need to read this document. That will tell you how you can invest the money’. ‘Okay, fine’. ‘Yes, carry on as normal’ or, ‘that's interesting, can I have an improvers? I'm not perfect. I like that improvers thing, encouraging companies to improve while I'm making money’.
Paul Richards: You both touched on this to an extent. These labels – first of all, Julia, can you remind us exactly what these labels are? What they mean? How the asset management sector is actually dealing with them?
Julia Dreblow: Sure. So, I'm on the DLAG – the Disclosures and Labels Advisory Group – with the FCA and I've been talking about this for several years before any of this existed. DLAG was set up as part of COP26 to steer the FCA. What we’ve come up with is three labels that basically cover the decent end of the spectrum of what people have been selling so far.
So, the labels we’ve got will be improvers (or at least these are the titles at the moment, they may yet change, but I don't think they’re likely to change dramatically). Improvers have got a good sustainability story within them, and they're looking for stocks that they believe have got the potential to improve. So, they'll be quite heavily stewardship-oriented. So, it'll be about engaging companies to encourage progress looking forwards.
Then you've got the sustainability-focused funds which are, if you like, the backbone of the good sustainability sector today where they're selecting stocks that are demonstrably decent and in line with the published criteria of funds.
The third are impact funds. And those are going to be funds that invest entirely in solutions companies or assets – things that are actually devoted to solving problems and measurable ways of delivering specific outcomes and types of change.
So quite similar but different strategies. As I say, the exact details as to how it's going to work and therefore the work that fund managers can do on it at the moment, because it's not finalised, there's a limit to what people can do right now. But we believe that broad structure is liable to hold and time will tell – it’s up to the FCA, they're not going to tell any of us if they’re going change it completely until they actually make a decision – but that's where we are right now.
Paul Richards: Okay. I think it’s fair to say, most advisers who will be listening to this conversation have clients who are invested in funds that are not sustainable in the majority of the businesses, not in these funds. What funds are likely to sit outside of these SDR labels?
Julia Dreblow: So, the kinds of funds that I think people need to look out for, though we can't be absolutely certain precisely which ones, will be those marketed more as being about ESG or responsible ownership, where they're doing the risk mitigation piece and encouraging change but not necessarily measuring and being able to meet the standards that will be required by the improvers label just yet. Now, my guess is we'll probably land up with some changes being made over the first year or so of SDR coming live. So, it may be that if a funds decides not to go for a label straightaway until they know they can comfortably meet the requirements and then it will adopt the label. So, funds that'll be outside that – that's one big, big group – and I think a lot of the passives and trackers will be in that group.
Another group that we believe at the moment will sit outside is ethical funds, which is a bit problematic, really, because in many ways those funds are way above and beyond what most funds in this area do. So, I would tell advisers this is just about understanding what your client wants and see if the fund meets their needs. Don't rely on labels as being the be-all and end-all. That's not what they're intended to be. Labels effectively came down from the Paris climate agreement and trying to meet Net Zero. So, their focus – because the FCA has been charged by the government with helping to meet Net Zero – is sustainability and, in particular, climate change. Those funds that go above and beyond actually fall out in the same way as those that are below in some ways, which is not helpful.
We're focusing on the existential threats here, right? And the purpose of an ethical fund is not to address existential threats. It's to align someone's personal values. So, they are subtly different but actually I think there's masses of overlap. I think the ethical funds could go for labels if they want, but it just might create problems for their clients, because their clients might say ‘hang on, I bought this because it’s ethical – why are you telling me this is now a sustainable fund?’ So, the pros and cons, and time will tell on this. But just make sure that funds meet your clients’ needs is what it comes down to.
Identifying which funds fall into which category (27.48)
Paul Richards: Okay. So, clearly, it's a work in progress. And I'll come to you on this one, Lee, because you and I talked about this is a different context the other day, and that's the fact that some advisers feel a little bit uncomfortable talking about this sort of stuff with their clients because perhaps they don't know enough, perhaps they’re worried that their clients don't know enough, they may be out of their depth, I don't know. In the real world, they are going to need guidance, our advisers, I think, particularly about which funds fall into which categories because, going back to Julia's point, we don't want another bout of mis-selling in the future. So, how do they make it easier for clients to understand what the clients are actually invested in?
Lee Coates: Well, being slightly facetious here, if you go back to MiFID and all funds having a target market statement, theoretically you just search the target market and it is available for a fund which has been designed for certain people. So, an ethical fund is sustainable, and an ESG fund should say in its target market statement that it's aligned to a particular target market. Yes, good luck on that one – finding them!
Julia Dreblow: We've got a couple of labels on our website, on the filters, where you can say who it's designed for. So, we go a little way towards that. But you're right. Getting the actual information on that is horrendous.
Lee Coates: It is difficult. So, it's about having good due diligence and it's also about making sure that you have a framework in place to make sure that – back to Consumer Duty – you're helping clients make an informed choice and so simplifying that process to start with. So, we recommend advisers use the spectrum of capital. So, just carving up the market into headline issues. So, that's what's available and then, like for Julia’s database, to answer the ‘how do they do it?’ question, you would then use a database. So, spectrum of capital is about informed choice. What's available? Conventional, conventional, with ESG, the labels and ethical, one side. That's the ‘what's available’? What route do you want to take? How do you want that route to be done? So, if a client chooses improvers, there'll be hundreds of funds sitting in the improvers label. They will be doing something different, especially if the majority are going to be active, each manager will say I'm actively managing the improvers label in a way that's special to me and special to the company. So, you'll need something like Julia's system to help you through that but you need to start by asking the right things in the right way at the right time, which is right at the beginning of the advice or, for existing clients, sitting them down at the next annual review and saying the world's changing, the rules are changing, this is not about pushing ESG, this is about saying Consumer Duty is here. I need to now move from the ‘what have you got’ to ‘how do you want it invested?’ And once that shift happens, it then cascades down.
Julia Dreblow: So, I'm going to give a plug for Fidelity here. Fidelity buys the data from our database. They don’t use all of it but one of the bits on there is the SRI Style categorisations that we have, which are a little bit similar to the spectrum of capital. Spectrum of capital really takes you on a journey from doing nothing to pure impact and philanthropy, which is fine, but what I do is drill down into so what does the fund really focus on? Let's just say what they do. So, is it really deep dive sustainability stuff or is it focused on just environmental issues on just social issues? Or is it more of a tilted-type strategy? And you've got those classifications on the Sustainable Investment Finder tool on your website, as well as additional filters which enable you to break it down by about 300 filter options – so exactly what funds do on our database – but Fidelity have picked up on the lead 30 or so that people tend to use on it.
Paul Richards: Thanks for the plug but I’m going to challenge you a little bit because I'm trying to put myself in the shoes of advisers here. So, you do some amazing work with regard to the information that you provide for advisers but there's a lot to get to grips with here. And one of the things I'm hearing from advisers is, maybe, for this sort of stuff, it's so complex. If I'm not outsourcing already, I will do to a specialist MPS provider or something. Do you see that is the likely outcome of this for some of it?
Julia Dreblow: Well, possibly so. I'll just be really brief on this because Lee will have things to say but my gut feel is this stuff is not going away – well not my gut feeling, I know! No, this stuff is not going away. So, if you start by outsourcing everything, at what point do you jump back in? Because, this stuff is really important. We provide masses of information and links back to fund manager websites that enable people to do all the research that they need to do – and Lee provides a process that helps. But if this is going to become a core differentiator of what someone who's an independent adviser, whose job it is to look after their clients and know what they want and find them solutions, why on earth – at this still relatively early stage – why would you outsource it all? And it also pays to read through DP23/1, which is the most recent paper that the FCA put out on basic culture and training and governance and that kind of thing, and one of their questions was around outsourcing and I think people will get themselves in a bit of a pickle if they're not careful there – if they outsource too much.
Lee Coates: I'm going to slightly flip the other way but absolutely agree with everything you said and maybe draw an analogy to the sustainable label. So, we got the label – or will have – which is called sustainable improvers, and maybe you could sort of paraphrase that slightly and look at advisers going through an improvers phase. You know, last night when they went to bed, they didn't ask the ESG and sustainable questions. And then, after this webinar, they will have a cup of tea, have some lunch, and then this afternoon, by magic, they'll have three ESG, sustainable and ethical centralised investment propositions – they're just going to set them up this afternoon! There's a transition phase so maybe outsourcing is part of that transition but, if you run a centralised investment proposition, my strong advice after 31 years as an IFA is don't think that you can then say, ‘Oh, we’ll just have an ESG one on the side’ because that isn't going to work, because actually what you'll need is an ESG one – but is it an ESG as a marketed ESG, green ESG, or is it ESG for risk? – then you’ll need an ethical one, then you'll need a sustainable – one for each of the labels – so you may have one conventional CIP and maybe 15 ESG, sustainable, ethical, impact, whatever options. Why do that until you've built up the knowledge and capacity internally to do the individual fund picking which, as Julia said, is the role of a financial adviser?
Some may argue that financial planning is about the plan, the delivery can be outsourced. That's fine, that's the individual firm’s needs. But MPS, something like MPS, is a good improver way of saying, okay, I'm still going to run the conventional CIP for clients that want the conventional route but, for those that want something else, if I can identify that's a good ESG MPS, that's a good sustainable, that's an ethical MPS, and they already exist, maybe that's a way of moving, I can spend my time having the conversation with the client, and the delivery can be done via outsourcing, and then, as I get more familiar and clients get more familiar with the process, we then bring that back in, and we know by how the clients split up – so that's a target market issue – that actually only 10% of the clients want ethical, is it worth putting the resources into building an ethical portfolio? I can outsource that. But most clients have gone into an improvers label, so I'll just produce an improvers Centralised Investment Proposition and do the fund picking.
Paul Richards: Perhaps it's the case if, as an adviser, you've got a predisposition to outsource, then you're going to carry on, add this to your portfolio, if you're predisposed to running your own portfolios or bespoke portfolios, you just need to get a grip on it, really.
Julia Dreblow: Yes, I think I was probably being a little bit harsh on MPS. Some people on the call may know I work very closely with a number of DFMs and others so I have absolutely nothing against them. But what that doesn't do is mean that the financial adviser doesn't have to think about it. So, basically, you still got to go through the thought process and work out which relevant portfolio applies to your clients. So, I'm saying you can't outsource your thinking on this – by all means use those portfolios – but you're going to have to know what the client wants in order to know whether those portfolios make sense. And don't think there's just one solution, there truly isn't.
Lee Coates: Yes. All my clients go into one MPS if they want anything to do with ESG and sustainable is a really bad way of approaching it.
Julia Dreblow: That's very 1990s!
Adviser skills and understanding (37.08)
Paul Richards: Lee, you mentioned you spent 30 years as an IFA and you specialised in this area – and this is not asking you to criticise our audience in any way because it's a complex area – do you feel advisers, generally, have got a grip on this area, do they have the skills and understanding necessary and, if not, what do they need to do?
Lee Coates: I'll get my coat! Generally, no. And that's not a criticism. I think it's just a reflection. We did a market analysis. We did a quadrant. Very brief, top left quadrant would be ‘Get it, understand it, do it, have a process’ and some firms, that's all they'll do, like my old firm. Some will be ‘No, we just reflect, if clients want it, we have a process’. Bottom right quadrant will be ‘Don't know, don't care, ain’t going do it’. In the middle is the mass market, which is some knowledge, some understanding, but often – the big one – I don't know what I don't know. That's the fear. So that's a barrier to entry for advisers – I don't know what I don't know and hopefully our new website, which launches on the 4th July, which will be free to access for all advisers, supported by Fidelity, it'll have some of that starting information and the tools to be able to move from that ‘I don't know what I don't know’ to ‘oh, I can see this, and I can see a process, I can see a way of doing it’, and then I can see the output element, which is using Julia’s tool to the fund picking, but before you get to using that, you need a process to find out how many of your clients actually want this. And this isn't just ESG, it's not a binary you either do conventional or ESG, it's – I'll come back to the spectrum of capital – knowing where your clients fit as a target market. So, clients who want sustainability, that's a target market group. How do they want that done? That's an individual decision – you need the tools to be able to pick that and that's where you do your mixing and matching.
Julia Dreblow: And I'd say alongside that, when I left Friends Provident in 2008 and I decided to set up my business because I knew advisers really needed help in this area, my immediate thing was just to pull all the funds together, get information on them and ask fund managers for lots of information on what they do. So, advisers needed help back then and I think they still need it now. I listen to people who regularly put themselves out as being experts in this area and they've got some pretty fundamental misunderstandings of what funds do and how this all works. So, please don't feel that you're alone. Please don't worry that everyone else knows this market and I don't, I'm just going to pass it to someone else, it's too hard. Everybody is on the learning curve with this one and the market is still evolving and when the new rules come out, we'll be on another learning curve – even those of us that helped design the things, there will be bits where other people's opinions have been taken. So, just recognise that it is what it is, if you like, and it's not going to go away. So, don't be scared of it, just get your head around it, and, by the way, read Doughnut Economics if you want to understand the financials of all this – Kate Raworth’s wonderful book, it’s really, really good – because then you get in the mindset of saying, ‘hang on, this is relevant to business’, this isn't just whether or not someone's bothered about animal testing or something – not that isn't a huge issue – but this is about really how business operates. And that's why it's going to become bigger and bigger and bigger.
Paul Richards: I've been looking at, quickly, some of the questions or observations advisers have been making and, if there's a theme, it's ‘crikey’. Put yourself in the adviser’s shoes – it's a tough job. We've touched on some of those already.
Julia Dreblow: We are trying to help!
Fact finding and compliance reporting (41.11)
Paul Richards: Just to go back to you, Lee, if I may, on some practical aspects of advice, if you like, for advisers and here I'm thinking about fact finding and compliance reporting and how advisers need to tackle that and how they can improve current processes.
Lee Coates: Yes, I would say probably the first starting point is to remove anything to do with ESG, sustainability, ethical, from the fact-finding process in the same way as most firms have a separate process for attitude to risk. Fact finding is about gathering facts. Then you move into attitude to risk – how would you feel if you lost 10%, how would you react? So, you’re starting to get into softer and then the next natural extension on those softer skills is how would you like the money invested? So, we know what you've got on your headline objectives. We know the risk tolerance when we go into the market. But which bit of the market do we want to go in? So, as long as there's a process, so – if you take the Consumer Duty – in order to deliver good outcomes, you need a good fact find process, firms will have that already, you need to then put that through an attitude to risk, firms will have that already, building this third element, which can be really simple but because it's treated separately, which is ‘how would you like your money invested?’, and that meets two objectives – one, clients are making an informed choice under Consumer Duty and, two, you're discussing their investment preferences and objectives. But you can't do the latter without the former, they can't know what their preferences might be unless they've had some information to say ‘I do want to continue exactly as we done before, and I don't want sustainability’, or ‘yes, maybe we could go 50/50’. It's just as new for the clients, don't forget. It’s new to them so, therefore…
Paul Richards: A third element is what you are suggesting?
Julia Dreblow: The other thing to add to that is don't expect clients to come in asking for it. Clients don't understand investment, right? But they know how they lead their lives. And it's the adviser’s job to draw out. Well, okay, this how you lead your life, do you want to bring that into the investment process? And the financial life survey that the FCA has done quite strongly points to why would someone not care about the way businesses they're investing in operate? They do care. And that's how we know we've got this mis-selling problem, partly, because we know that all the research is pointing to high levels of interest when asked.
Paul Richards: So, I guess it’s getting comfortable to ask the right questions?
Lee Coates: In the right way, at the right time.
Key takeaways (44.03)
Paul Richards: So, just before we finish, I'd like to ask you both the same question. And that's just if there’s one thing advisers should be taking away from this session, what would that be?
Lee Coates: So, it would be do it! One, because Consumer Duty requires you to do it, as in start asking the question. But don't ask it in isolation, you've got to ask it as part of a bigger thing. How would you like your money invested? To which the client would respond ‘but what does that mean?’. You've got a conversation going. Ideally, give them a document to read beforehand and go ‘you’ve read that, yes? Let's have a discussion about how you want your money invested’. Brilliant to engage clients. Very much, ‘Oh, hang on, you’re talking about me now, are you? Not about things and ISAs and things, you’re talking about me? Yes, let's talk, brilliant!’ Good to engage clients but you got to talk to them first.
Julia Dreblow: Yes, I agree with what Lee just said, definitely. But my angle will be slightly different, which is don't expect this to go away. So, grab it with both hands. Recognise, yes, it's a risk, but it's also a massive opportunity. Really, really focus on the fact this is here to stay and understand the real-world issues and how they hit in the investment world because it matters.
Lee Coates: I just like to practically reinforce Julia's thing there, which is those of us who are old enough to remember the tech boom and pretty much everybody now will remember that furore and fever pitched selling of BRIC funds. Yes, bye, bye, they’ve all gone now. Everybody's bored and moved on. This ain’t going away!
Paul Richards: Good. Well, on that point, let's call it a day. A fantastic insight from you both. Thank you so much for joining us today. And thank you to our advisers on the call, it's been a large number of you, I hope you found it useful, it's given you some ideas about how to frame those conversations with your clients about sustainable investing.
If you want to revisit some of those themes and, indeed, if any colleagues in your office who have not been able to join today, we will be sending out a video recording of the session next week together with the confirmation of your attendance. You'll also receive a short feedback survey – it'll take a couple of minutes. We're always looking to improve and the way we improve is by taking onboard your feedback. So, many thanks for joining us today and enjoy the rest of your week. Thanks a lot.