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FOR ADVISORS ONLY
As the world transitions to a more equitable and lower-carbon economy, ESG and sustainability will play a bigger role in investment management. Over the last five years, we’ve seen a doubling of signatories1 to the United Nations-supported Principles for Responsible Investment (PRI).
Sustainable investment funds (mutual funds or ETFs that explicitly focus on ESG or sustainability in their investment objective) are experiencing similar growth. According to Morningstar’s global research, sustainable investment funds maintained positive flows and finished the year at US$2.5 trillion under management2. Canada had a similar experience of positive flows throughout a challenging 2022 and ended the year with about C$38 billion in assets2. The retention and the growth of these assets suggest that they are more resilient to market cycles than traditional funds.
Investors are increasingly asking about investing sustainably, and we want to do our part to support financial advisors in addressing that interest.
To help facilitate conversations between advisors and investors about sustainable investing, here is a short set of questions that advisors can ask to gauge their clients’ interest (in part two of this article, we’ll look at questions that clients are likely to ask advisors).
Key questions to ask clients
1. Which non-profit or charitable organizations do you currently support with your time or money?
This question is a pointed attempt to determine clients’ social and/or environmental priorities. We can determine which issues are important to them based on their response. For example, a client who donates to the World Wildlife Fund (WWF) is more likely to care about biodiversity, while a client who volunteers with their local food bank is more likely to care about whether employees are being paid a fair wage.
Ask for more information if the client mentions an organization that you’re not familiar with. They’re likely passionate about the organization’s mission, and showing curiosity will help you build trust as they explain the organization’s goals and impact. Here is a list of organizations and the ESG issues that could be important to their supporters:
If your client doesn’t currently support any organizations or struggles to answer this question, it’s a signal that they’ll likely be happy with a smaller step towards sustainable investing, such as ESG-integrated funds.
2. Do you want to your investments to align with social and/or environmental values, such as gender equality and climate change?
Asking about values alignment is an easy way to start the conversation about sustainable investing. Keep in mind that clients may have heard the terms “responsible investing”, “socially responsible investing”, “ESG investing” or “sustainable investing” so it can be helpful to explain that these are all different terms for the same thing.
This question is really just a “temperature test” of the client’s interest. It opens the door to further dialogue, but it also allows the client to politely close the door if they’re not interested.
Recent SRO (formerly IIROC) guidance on know-your-client rules suggests that you ask this question when determining your client’s investment objectives, alongside time horizon, risk tolerance, etc. You can simply add this question to an existing KYC form or ask about it during the first meeting with a new client.
If asking this question on a form, allow options for yes, no and need more information. Many people won’t know how to approach this question, so the third option is needed. If you’re asking in person, pay attention to the speed of their response. A quick yes suggests the client is very keen and will likely expect a stricter methodology. A quick no means you can stop there.
When the client asks for more information, use very high-level language like, “Some clients have a strong preference for avoiding certain companies, based on their values, such as tobacco and weapons companies. Others go out of their way to invest in companies that earn revenue by solving environmental challenges like water scarcity and climate change. Do these resonate with you?”
The client’s answer will go a long way in determining their level of interest and commitment to sustainable investing.
3. Are there any companies or sectors that you want to avoid completely?
With a wide spectrum of funds available, this question helps narrow down which products are in alignment with the client’s expectations. Specifically, it helps determine whether to show them funds that use ESG integration (which won’t have as many negative screens) versus sustainable investment solutions that exclude the “sin sectors” like tobacco, gambling, controversial weapons and private prisons.
Knowing the client’s red flags in advance will ensure that you don’t make the mistake of showing them a fund with a problematic company in the top 10 holdings, as this erodes trust very quickly.
4. Do you want to allocate part of your portfolio to funds that invest in companies that earn revenue by solving social and/or environmental challenges?
This question introduces the possibility of adding a thematic sustainability fund to the client’s portfolio. It differentiates the sustainable core, sustainable thematic and sustainable impact approaches, which is a very important distinction for clients to understand.
The goal of sustainable core funds is to provide long-term capital appreciation by investing in companies that are considered to have progressive environmental, social and governance practices; this prioritizes companies with good behaviour. This approach focuses on earning market rates of return in a manner that is aligned with the client’s values.
Meanwhile, sustainable thematic funds target specific environmental or social macro-trends or themes that are expected to generate competitive returns. Given the systemic nature of these trends, it’s good for investors to have some exposure to them. This approach can offer the client exposure to “green” themes like renewable energy and water infrastructure that will benefit from the economic transition to a low-carbon future.
Finally, sustainable impact funds prioritize outcomes pertaining to environmental and social challenges or opportunities which take priority relative to financial return.
More help with your sustainable investing conversations
For more information about discussing sustainable investing with your clients, talk to your Mackenzie Sales Team. Click here to read part two of this article, which will help you prepare for the sustainable investing questions your clients are likely to ask.
Source:
1 from the 2021 report that shows about 2300 signatories in 2017 and the 2022 data has 4902: https://www.unpri.org/annual-report-2021/how-we-work/building-our-effectiveness/enhance-our-global-footprint
https://www.unpri.org/annual-report-2022/signatories
2 https://www.morningstar.com/lp/global-esg-flows
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