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FOR ADVISOR USE ONLY
In part one of this article, we looked at questions you can ask your clients to help start meaningful sustainable investing conversations. In this, part two, we prepare you for the types of questions you can expect to hear from your clients during these conversations.
1. Have sustainable investments underperformed traditional funds?
Respond with an emphatic no. This question is very common from clients and suggests an assumption that sustainable investors sacrifice financial performance. It’s important to reassure clients that there isn’t a financial trade-off to integrating ESG analysis or participating in shareholder engagement. In fact, it allows us to better identify emerging risks and ensure that companies in a portfolio are well prepared to prosper into the future.
Deviation from the benchmark will start to emerge as you go further along the spectrum of sustainable investment solutions. Negative screens do limit diversification, and that can have an impact on financial performance — for better or for worse.
When discussing historical performance, place the emphasis on correlation to the benchmark. The focus should not be on whether the fund has outperformed or underperformed, but rather how it earned roughly the same amount as the benchmark. Explain the deviations broadly.
Remind clients that your job is first and foremost to help them meet their financial goals. Any discussion of sustainable investing is done with that in mind. Additionally, it might be reassuring to mention that the largest pensions in Canada, like the CPP, OTPP and Caisse de dépôt et placement du Québec all use sustainable investment strategies.
2. What’s the difference between ESG-integrated and sustainable investment funds?
This question is an opportunity to teach the client about the range of options that are available.
Traditional funds only consider financial factors in investment decisions. ESG-integrated funds consider ESG factors alongside financial factors in order to lower risk. Shareholders also have voting rights, as owners of the company. While we don’t expect clients to show up at annual general meetings, funds use proxy voting on their clients’ behalf. Mackenzie uses this opportunity to proactively engage companies on issues like gender diversity and climate change, advancing them towards sustainability.
Sustainable investment funds incorporate ESG factors and practice stewardship, but also use approaches like negative exclusions, best-in-class and thematic focus to achieve closer alignment to strong social and environmental values.
A client asking this question is a good sign that they’re ready to narrow down which type of fund they may prefer.
3. Does sustainable investing actually make a difference? Isn’t it all just greenwashing?
This question suggests that the client likes the concept of sustainable investing but needs some reassurance that the approach will generate real-world impact. Greenwashing is when corporations use deceptive advertising or marketing spin to suggest that its products or policies are more environmentally friendly than they really are. Clients who are worried about greenwashing are likely more aware of sustainable investing but skeptical as to its ability to change anything.
As an advisor, you need to be cautious with your answer. If you over-sell the impact of sustainable investments, you could lose the trust of your client. Instead, you can start by acknowledging the following:
a) Sustainable investing is not a silver bullet or panacea and involves complex issues without easy answers. It won’t change the world on its own but it is one more tool that can help enact change.
b) There is no such thing as a perfectly sustainable investment portfolio. We are trying to take a step in the right direction, and it is up to the client how big of a step they want to take. There might still be companies within a portfolio that they’re not 100% comfortable with, but it’s much better than the status quo alternative.
c) Finally, explain that the investment industry has a large impact on the economy. By investing sustainably, we are directing capital towards companies that are ahead of the curve on these issues and pushing the laggards to catch up.
4. How do I know if the fund is actually doing what it says it’s doing?
A client who asks this question is keen to “look under the hood” and better understand sustainable investment approaches. This is a great opportunity to present the specific funds that you recommend. Take them through the methodology, starting with any negative screens. Then explain ESG integration and shareholder engagement.
The final step is to show your client a list of holdings. Familiarize yourself with the top 10 holdings of each fund and show a case study that relates to one of your client’s environmental or social priorities.
Ask the client to scan the list of holdings and to identify any red flags. Take note of any companies that stick out to them and ask them for context as to why they take issue with the company. Reiterate that all companies go through ESG analysis, and we are using shareholder engagement to push them in the right direction. However, if the client feels strongly that it should be excluded then you can move them further along the sustainable investing spectrum.
5. What do you really think about sustainable investing?
Certain clients might ask you for your own personal opinion regarding sustainable investing. This question usually occurs towards the end of their decision-making process, where the client may be looking for reassurance t on this investment approach.
Make sure to leave any politics out of the conversation. Even if you don’t agree with their priorities, it’s important to recognize and respect them. If you’re unsure how to continue the conversation, bring it back to the client’s financial goals and how to best achieve them in line with their values.
The most helpful response to this question is to tell the story of your learning journey around sustainable investing. It’s fine to admit if you were skeptical at the start (most people are). But explain how you gained more confidence as you learned more about the different approaches. Reiterate that you’ve had to go through know-your-product seminars on these funds, and after researching them, have become more supportive of sustainable investing. It’s helpful to share success stories of other clients in the space for context.
6. How much should I initially allocate to a sustainable investing strategy?
This question suggests that the client is ready to start putting money into sustainable investment funds but might be cautious about how much of their portfolio they want to allocate. You want your client to feel comfortable investing a little or a lot, so reiterate that investing in sustainable funds can be a sound financial decision alongside a good ethical choice.
This question is also a great opportunity to discuss how to split the portfolio across the sustainable core or sustainable thematic approaches. At this point, you should have a good understanding of the client’s expectations and can recommend an asset mix that reflects their risk tolerance and time horizon that is in accordance with their vision of a more sustainable future.
If the client has existing holdings, it’s fine to keep those holdings as-is and start allocating new money into sustainable investment funds. This will allow you to use subsequent meetings to compare the financial performance of each strategy, and only move everything into sustainable funds when the client is fully comfortable.
More help with your sustainable investing conversations
For more information about discussing sustainable investing with your clients, talk to your Mackenzie Sales Team.
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