Adviser education key to meeting ESG investment demand

From

Yo Takatsuki

High demand for environmental, social and governance (ESG) investment options, and an expanding investment universe, will make ESG an essential talking point in adviser-client conversations in the coming years, according to AXA Investment Managers (AXA IM).

Ahead of the launch of the Financial Adviser Guide to Responsible Investment from the Responsible Investment Association Australasia (RIAA) and AXA IM, Yo Takatsuki, Head of ESG Research and Active Ownership at AXA IM, said he expected to see an increasing array of ESG options becoming available, which advisers would need to become familiar with.

“Funds that have been established to target specific social and environmental objectives, often called impact funds, are becoming far more ambitious in their investment goals. They are attracting sophisticated investors who expect very clear and detailed reporting, both quantitative and qualitative,” Mr Takatsuki said.

“As client demand grows, advisers need to familiarise themselves with responsible investment options to ensure they are offering clients products that are value-aligned, while also achieving strong financial returns.”

Mr Takatsuki added COVID-19 had drawn attention to the need for finance to drive real-world outcomes.

“The developed world had almost started to believe infectious diseases had been overcome. However, the pandemic has highlighted that preventing and addressing such problems involves ongoing investment in entire systems – not just in the high-growth, high-return aspects,” he said.

Demand and regulation to make ESG a focus for advisers

The Financial Adviser Guide to Responsible Investment, is free and sets out to demystify responsible and ethical investment for advisers.

Simon O’Connor, Chief Executive Officer of RIAA, said RIAA had been measuring the size and growth of the responsible and ethical investment markets in Australia since 2002 and over that time the industry continued to gain momentum.

“The rapid growth in responsible investment has been driven by client demand and strong investment outcomes, with clear evidence that responsible investments deliver stronger risk-adjusted returns.

“The regulation of advice is also catching up. The new FASEA Code of Ethics requires advisers to consider the broader long-term interests of their clients, arguably requiring advisers to consider responsible and ethical investments if they are in the clients’ best interests.

“The good news is that by accessing our Guide – and educational resources from firms like AXA IM – advisers can strengthen their knowledge in this area, to deliver the best advice to clients,” Mr O’Connor said.

Responsible investment goes mainstream

In Australia, there has been significant growth in the responsible investment industry since RIAA’s last Guide was released in 2018.

RIAA research[1] found the industry hitting new heights, with $1,149 billion now managed as responsible investments, up 17% from $980 billion in 2018. Today 37% of all professionally managed investments are managed using one or more responsible investment approaches.

However, the RI universe is significant and covers a range of different investment approaches that all consider more than traditional financial information.

“From impact investing to ESG integration to negative screening, there are many different strategies for engaging in responsible investment,” said Michelle Lacey, Head of Core Client Group, Australia, AXA Investment Managers.

“The challenge for advisers is understanding the differences between the responsible investment approaches, products, and providers available in order to provide the advice that best matches their clients’ needs.

“RIAA’s research shows Australian investors would like to increase their allocation towards impact investments more than fivefold over the next five years, so we believe this should be a particular area of attention for financial advisers,” Ms Lacey said.

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[1] RIAA: Annual Responsible Investment Benchmark Report 2020

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