FT Adviser Podcast - How advisers can choose the right responsible investment

31 July 2020
Listen to our latest collaborative podcast with FT Adviser.

Ryan Medlock, Senior Investment Development and technical manager joins David Thorpe, Special Project Editor at FT Adviser and Minesh Patel, Adviser at EA Financial Solutions to explore the vast range of responsible investment funds available to advisers and the considerations an adviser should have when selecting these funds for their clients.

David Thorpe:               

Hello and welcome to the FTAdviser four part podcast series on ESG investing brought to you by Royal London.        

This episode of the podcast looks at the considerations an advisor should have when selecting responsible investment funds for clients.  I'm David Thorpe, special project editor FTAdviser.  Joining me to discuss the topic today are Ryan Medlock, senior investment development and technical manager at Royal London and Minesh Patel an advisor at EA Financial Solutions in London.  Thank you both for joining me today.

Ryan Medlock:               

Thank you.

Minesh Patel:                   

Pleasure.

David Thorpe:    

Ryan, has the ESG investible universe evolved in recent years in a way that means constructing a genuinely diversified portfolio of such assets is now possible?

Ryan Medlock:                     

I think yes, it is now possible.  I think it’s still in its infancy overall.  I think that there are obviously more and more solutions now available for advisors to choose from for their clients.  I think if we think about ESG integration in general, obviously as an asset class it’s much easier to be done in equities.  Obviously in fixed income it’s more about engagement, incorporating ESG into the analysis.  You’ve also got a growing consideration of ESG in alternative assets.  Obviously there's a variety of different responsible investment approaches and techniques that specific funds and specific managers can take into account. 

Obviously exclusions, that’s probably the most commonly known responsible investment approach.  That is just one approach.  It’s not a case that all ESG portfolios or ESG managers are going to be excluding the same stocks.  You’ll have some managers also adopting particular agendas, so whether that’s positive screening or through specific engagement programmes.  You’ve also got more and more managers integrating ESG into their wider investment processes.  Obviously there's a variety of ways that you can go about doing that and it certainly isn’t a one size fits all approach.

David Thorpe:                 

Minesh, from your point of view as an advisor it may have been that a number of years ago if you wanted to put an ESG fund into a portfolio you probably had a relatively narrow range of funds from which to choose and a lot of funds that did quite the same thing.  But do you feel that that has changed in recent years and that the number of options that you’ve got for clients has expanded?

Minesh Patel:                      

The universe for ESG investing has certainly improved.  In addition to the number of solutions that are available, I would also add that the awareness of what is available is – has improved greatly.  From multi-asset portfolios to individual funds.  So if you're building portfolios you can build bond equity, put equity funds in combination.  The fund – the ESG/ethical/sustainable investing has been available for some years, but I think has become a theme which is a must, rather than a possible.  What has been very encouraging is that all fund and management groups are now seeing ESG as being integral to their future, not just something they may consider at a latter point.  So my views are that it is a well-served area of investment which is improving day by day.

David Thorpe:                   

Minesh, I guess one of the central aspects of the work that you do with an individual client is the risk profile – their whole attitude to risk.  Can responsible investing funds adjust?  Can you make a portfolio adjust for clients who have different risk appetites?  Is that now possible or is it that they all have a similar approach to risk?

Minesh Patel:                       

You’ve got – in the – in terms of attachment of risk and appropriate risk, you’ve got multi-asset portfolios.  The Royal London World Sustainable trust portfolios are multi-asset, in that they can be constructed on an appropriate risk basis.  But you can also build equity bond portfolios to match the appropriate risk of the client.  I feel that multi-asset usage of ESG style investing is an extremely simple, easy way for advisor and clients to access ESG investing.  Now indeed, the Coronavirus crisis and resultant economic damage and health disaster has yet again brought to the forefront of considering wider factors such as the sustainability of our planet and sustainability of our health.  So I think that the Coronavirus can only accelerate demand for ESG-based investing.

David Thorpe:                

Ryan, Minesh mentioned some of the products that Royal London have on the market and that many of them are multi-asset, how do you guys as providers view risk profile within the responsible investing universe?

Ryan Medlock:                     

Well there's a number of things here.  Obviously Minesh rightly talks about the different portfolios there in terms of individual funds which can be risk profiled and suites of solutions which are risk profiled as well.  I think a lot of these package solutions, whether they're part of a suite or individual funds which are risk rated from an ESG perspective as well are all about producing focus differentiated portfolios with long time horizons.  They're generally flexible enough to cater for different risk appetites. 

A point that I really want to focus on here is about the emergence of third-party ESG tools.  I think these tools are going to play a huge, huge role going forward in terms of screening and filtering different solutions based on clients’ ESG preferences.  [I’ll name-check] a couple [here], but Fund EcoMarket and Morningstar sustainable ratings.  I think going forward how as an industry we adopt these and how advisors go about integrating this within their wider APR process, I think that’s going to be a big [theme] going forward.  Obviously that is something which is still very much in its infancy.

Minesh Patel:                        

Adding to what Ryan just said, Fund EcoMarket is an exceptional tool for filtering the type of ESG/ethical sustainable investing that you wish to consider, that they have a very thorough screening method.  So I think that the awareness, as Ryan has mentioned, of ESG tools needs to be improved.  Once advisors realise there are tools like Fund EcoMarket, or get to know them better, then the idea of ESG investing becomes far more straightforward.

David Thorpe:                  

Ryan, has the ESG investible universe evolved to a point where, in your view as a provider, you – responsible investing funds can now play a role in a client’s income portfolio or for a client in the accumulation?  I guess up to now it’s very much been seen that lots of those income staples that were in traditional portfolios, such as tobacco and armaments might not be in a responsible investment portfolio, but are there alternatives to that that can give you income within the responsible investing context?

Ryan Medlock:                    

Yeah, I think there is.  I think income portfolios generally have massively [evolved] in recent years.  It’s not just about bolting income producing funds together.  You can even argue at this point - where we are in 2020 - you could argue what exactly is an income fund?  With various businesses suspending dividends and the Investment Association suspending their rules around the UK and global equity income sectors.  There’s certainly a lot more to income portfolios than that, particularly in the context – if we think about centralised retirement propositions as well and the whole framework for providing retirement advice. 

But if we talk about responsible investment in an equity income context, I think you're always going to unearth this specific conflict of on one hand the business paying dividends and on the other hand having a resilient based approach to investing and being more aligned to longer term strategic planning.  I think a lot of this ultimately comes back to the client’s individual needs and their individual ESG preferences.  I do think responsible investment funds can serve a purpose within income portfolios.  It very much comes back to the old argument about diversifying the income stream.

David Thorpe:                    

Minesh, from your point of view with clients that are in decumulation, or coming towards decumulation, or just generally investing for income, how do you view responsible investing in that context?  Is it the old cliff edge scenario where they're in accumulation and then they go into decumulation?  You sell everything that they had in accumulation and start again for decumulation, or can you carry a responsible investment fund from one end to the other?

Minesh Patel:                     

Okay.  So in large depends on what you perceive to be an income stream.  So if you're looking for separation of income from capital then there are responsible investment funds which are in the UK equity income space and also fixed income space.  So your income generally would come from a diversified portfolio from a dividend income and coupons from fixed income.  So you can build that type of portfolio.  If, however, you're content to start selling accumulation units or for income generation or a combination of natural income plus capital growth, then you may not need to change the portfolio. 

I think – would I - as an advisor do I change the investment philosophy from accumulation to decumulation?  Not generally, but it can take a slightly more income bias going forward so there's more natural income created.  Clearly that is very easily achievable when you're using, for example DFMs, that you can adjust the portfolios are in – ours are in - entering decumulation.  Indeed, I think that that’s a role – I think they are incorporating ESG much more widely into their portfolios.  So, for example, we use Quilter or have considered Quilter when we’re looking at that type of approach.  So it largely depends on whether you're looking to create a natural income stream or a combination of capital growth plus income or just capital growth.

David Thorpe:                   

Minesh, I suppose to take that point a step further forward, if you felt as advisor that it was appropriate or the client felt it was their desire to take less risk in their portfolios, how can you view a responsible investment fund in that context?  Is there a way of saying that’s a responsible investment fund at the riskier end of the spectrum and that one’s at the lower risk end of the spectrum and I can switch between the two?  Do those options exist?

Minesh Patel:                     

Yeah.  Well, the risk levels can be adjusted on the Royal London portfolios.  For example you’ve got from cautious to adventurous and you can go up and down the scale if you want to de-risk.  If you're putting together your own portfolios you can obviously sell down some of the equity holdings in favour of bonds if you're looking to de-risk.  Or [if it’s] a DFM, to instruct the DFM that you wish to take less risk.  But it’s interesting as to this idea of taking less risk.  I think in terms of what clients tend to do unfortunately is want to take less risk too late.  So many clients after the sell down in equities wished to take less risk and by that time it was too late. 

I personally think it’s getting the right portfolio to withstand many different market conditions and just stick with it over a different period, rather than moving up and down the risk scale.  Financial planning essentially is you're looking at – you're making assumptions based on investment returns.  Now – so it’s an interesting point about de-risking.  It’s perhaps another debate for another time.

David Thorpe:                   

Ryan, is it something to be debated or looked at, but how do you at Royal London approach that issue of constructing portfolios within sustainable investing that are higher risk or lower risk?  Is it as simple as that’s what bonds do and that’s what equities do?  Or do you think that really the conversation has to move on from that,  especially given conditions in the bond market where some of these things are starting to yield negative yields now that would have traditionally been viewed as lower risk assets?

Ryan Medlock:                     

Yeah, I think that’s really interesting.  I think it touches on both sides of the coin there.  As Minesh talked about there, specifically on the Royal London sustainable range, you can move up and down the risk gears and the asset allocation is adjusted accordingly.  Now that’s just one mechanism and that’s, to be honest, probably the easiest way of shifting through the risk gears from an ESG perspective as well.  I do think – we touched about it on the previous question as well – again, I think probably third-party ESG tools are going to play a significant role here again. 

Because I do think by applying those tools and adopting those tools within advisor processes, I do think that can ultimately enhance the overall ATR process.  That’s going to help out – allow advisors to create ESG-specific or responsible investment specific centralised investment propositions for clients with different risk appetites and different time horizons.  You’ve also got more managers integrating ESG into their various processes, crossing over into more mainstream investment strategies as well.

So I think in a couple of years’ time it’s not going to be a question about how you de-risk from an ESG perspective, I think it just becomes a general question about how you de-risk in general.  Ultimately a lot of those ESG considerations will be built into advisors’ existing research and due diligence processes.

David Thorpe:                   

Minesh, from your point of view as an advisor, I'm quite interested to hear really how you incorporate ESG into those processes and into client fact finds.  What role – how does that fit in with, I suppose, the more traditional fact find approach and traditional conversation that you would have?

Minesh Patel:                      

So, IO – Intelligent Office – who are our back office provider, now have a specific question on the fact find as to ethical social considerations.  So that you either tick yes or no.  Going further Fund EcoMarket have an SRI fact find, which is 25 questions.  So where there is interest expressed and a deeper interest, we have incorporated that SRI fact find.  Then that fact find it does direct you to the style of sustainable investing or responsible investing that the client wishes to consider.  For example, negative screening, ethically balanced, sustainability, ESG.  So there's – although all the terms get blended into one, they are actually distinct categories. 

An area that I find sometimes difficult to compartmentalise to be honest, so I do have to keep reviewing what the different criteria are.  However, again I think that is just familiarity and experience, but the tools are already available for advisors to probe much more deeply on ethical considerations.  I suppose it’s knowing where to look.

David Thorpe:                   

Ryan, I suppose - the conversations I used to have with advisors, if you brought up the topic of ESG, an advisor would say, well if I'm asked about it I know what to do.  We've now had regulatory changes around fact find that means that’s not really enough anymore.  From the point of view of the advisors that use your products and the conversations that you at Royal London have with advisors, what’s your experience of how they are incorporating it into their existing processes and what role it plays in those processes?  Is it grudgingly added on at the end?  You know, here is everything, oh by the way do you want some ethical?  Or is it deeper than that?

Ryan Medlock:                    

Yeah, I think that was very much the approach what you would have had maybe four or five years ago where it very much felt like a bolt-on to the overall service and proposition.  I think things have moved on obviously over the last couple of years as this has become more popular and more integrated.  I do think a key consideration here is before advisors look about trying to integrate this within their formal processes a pre-cursor has to be engaging the client on some of these ESG issues. 

I think Minesh touched on it very early on as well, the fact that it’s quite unique in that COVID, the pandemic and the lockdown all of this I think has given advisors a bit of a unique opportunity when it comes to ESG.  Particularly when you think about the S and the G issues.  They’ve definitely been more magnified during the lockdown.  Particular examples are how certain businesses have been treating their workforce.  The focus on flexible working.  Things like that.  There's been lots of really good and lots of bad examples over the last couple of months.  

From an environmental aspect there's been plenty of headlines about the reduction in carbon emissions and humanity’s impact on the natural world.  I think the pandemic and the lockdown has generated a lot of these topics to engage clients with.  It’s then important to think about how you want to integrate some of these considerations into the research and due diligence process as well.  Again, before you start trying to think about what fact find questions [you can have] – I mean Royal London as an asset owner, we have a number of asset managers managing our customers’ money on our behalf. 

It plays a part in our due diligence processes as well in terms of trying to gather as much information as we can on their approach to responsible investment.  So, questions around what the asset managers are signatory to in terms of different codes and initiatives, what type of issues and subjects that they typically engage with their companies on.  A good starting point, or template if you like, to all of this might be for a signatory to be UNPRI.  Requesting copies of their annual report - the annual assessment report - as well, which is generally seen as a good benchmark for ESG performance.  So I do think that there are some wider considerations before you just suddenly bolt on some fact find questions.

David Thorpe:               

Ryan, if those are the themes, I suppose, that are out there, how do you move that conversation with the client on?  How do you frame the questions around those themes to really get the clients – to get an understanding of the client’s view of how important each one of those separately and together is in a portfolio?

Ryan Medlock:                   

I think as Minesh talked about earlier, there’s specific fact finds out there with really good responsible investment style questions that you can incorporate in there.  I tend to think that the best questions to ask clients about their ESG preferences are those that really gauge a client’s basic feelings about ESG factors.  So as an example – really basic example here – how strongly do you feel about environmental factors such as climate change and a company’s environment footprint?  You could substitute that and talk about questions on social factors, governance factors.  So collectively you're tugging at a client’s different feelings towards ESG issues. 

I think then it’s a case of trying to bring them to life with examples.  So you could link them to specific ESG issues we've had around COVID, which we've just talked about.  Or you could perhaps use something a little more formal such as the UN’s social development goals framework.  That’s something I'd definitely encourage you to take a look at and perhaps use as a reference point.  It might be worth also including questions which tug at different responsible investment approaches.  So, for example asking the client if there's any particular sectors or particular companies that they want to avoid, because that could indicate a preference for an exclusions-based approach. 

Ultimately I don’t think there's any right or wrong approach here, but I do think the point about client engagement and bringing the impact of ESG to life is a really, really important point.

David Thorpe:                   

Minesh, I guess a theme that’s run constantly through the conversation we've had today is how the responsible investing universe has evolved.  It started off exclusion and then some clients became aware of environmental and climate change and those things get added to every year with new considerations around treatment of staff et cetera.  As an advisor, to understand which are the priorities for a client, what does that conversation look like?

Minesh Patel:                      

Fundamentally do you as an advisor care?  Do you really care beyond your business?  Do you actually think of – so COVID-19 has – will, I feel, make society a kinder place.  Whilst profit is critical for business, it’s critical for clients, it’s critical for all, profit can be made with good practice, good sustainable practice, which benefits all.  I think the theme that we can take away from COVID-19 and perhaps the way we've embraced the miraculous work that the NHS workers do, from your doctor to everyone involved, has demonstrated that perhaps thematic investing which incorporates responsible investing, sustainable investing, will lead to more profit but more importantly a better society. 

So I think that the theme that I perhaps would look at is do we as an advisory community communicate how much we care about issues beyond their profits and their financial planning?  That enthusiasm then becomes something that you can incorporate with much of what Ryan has said, that you can build that into things like the UN approach.  So it’s - good practice is always led by someone.  So if you’ve got a decent client base with people who trust you, which is generally the case right throughout the advisory community, that enthusiasm and that theme can be led through your own work.  So I feel that is the way forward.  That we as advisors look at much more than what we are used to talking about. 

I would add that I feel that advisors and advisory firms are doing an incredible amount of good work throughout the community.  I see many acts of - massive charitable donations, fundraising et cetera.  So there is that desire to do better.  I think it’s just now accelerating that desire to do better.  Better meaning more responsible for our planet. 

[Over speaking]

David Thorpe:                   

Thank you very much.  Ryan, Minesh, thank you very much for joining us today on the podcast.  Some very interesting talking points I thought.  Thank you to everyone for listening and please do look out for the regular weekly podcast series that the FTAdviser team put together on a wide variety of topics.  Thank you.

About the author

Ryan Medlock

Senior Investment Development & Technical Manager

Ryan’s journey with Royal London began back in 2008 after starting his career in compliance with Norwich Union. As an Investment Proposition Manager, Ryan contributed to the growth and development of Royal London’s Governed Range before moving to Aberdeen Standard Investments for a stint in the Strategic Client’s relationship team. Ryan returned to Royal London in 2018 with a focus on exploring adviser angles amongst complex regulation and investment themes. Ryan is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Ryan holds the IMC qualification. Ryan is particularly proud of the fact that he finished 952nd in the 2008/09 edition of Fantasy Premier League.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.