CREALOGIX Insights: Empowering Digital Wealth Clients with Impact Criteria

Impact investing is a hot topic; as investors have become more aware of the wider impact of their investment in companies, there has been increasing demand to tailor their investments to align with their values. ESG and impact criteria can help investors understand which companies and assets are best suited to them. As more information becomes available, investors are set to become far more informed and empowered than ever before, closely integrating their personal values and social concerns with their investment strategy.

The demand for investment strategies that incorporate ESG and impact criteria is growing very rapidly. Research from the FT showed that last year, over 400 new ESG funds were launched. In the first half of 2020, more than $100bn of new money was allocated to the industry and AUM of funds that incorporated ESG impact criteria rose from $12 trillion in 2012 to more than $40 trillion in 2020. ESG impact criteria have moved from a niche concern to the mainstream. Research from AKG with Charles Stanley showed that 60% of advisers are now factoring in ESG-related questions when speaking to clients. A further 22% expect to introduce ESG-related questions in the next 12 months. Even more interesting is the fact that the same research highlighted that 24% of people with investable assets of more than £100k have independently reviewed their investments to ensure that they are sustainable and socially responsible. This suggests that investors may be willing to act and move their investments if their expectations in this area aren’t met.

Bridging the generation gap

The younger generation are at the vanguard of prioritising impact and sustainability issues. This makes it both a risk and an opportunity that shouldn’t be overlooked, due to the intergenerational transfer of wealth. When it comes to younger investors, the difference may be in their expectations; ESG impact criteria will be front and centre for any investments decisions that they make and challenger brands are seizing the opportunity to meet those expectations with investment solutions that put the client in the driving seat when it comes to ethical concerns. Growth in this area has also coincided with the activation of retail investors, a growing segment that may have less to invest now but nevertheless are growing in numbers and have ESG impact criteria at the top of their list of priorities.

The increase in regulations regarding ESG across the globe has reinforced the importance of transparency in this area

Digital solutions can help to join the dots between suitability and sustainability

Implementing a digital solution that captures clients’ ESG priorities and concerns doesn’t just tick a box when it comes to one of the major investment trends of recent years, it can support growth through attracting new clients and increase engagement with existing clients. Increasing the agency of clients by providing them with choice when it comes to ESG impact criteria is a positive way to increase engagement with both their investments and your digital solution. If we return to those investors who are currently independently carrying out their own research on these issues, more proactive communications and transparency can improve loyalty and, in turn, share of wallet. Self-service, through the selection of key criteria or issues, can also improve efficiencies in a wealth management firm by allowing for some level of automation in tailored communications.

How all this might work in practice is that clients can be encouraged to express their choices via the firm’s portal or app; these choices may be positive – for example, companies that are low carbon or deliver clean energy – or they may be exclusion criteria, such as tobacco companies. There are extensive data available to wealth management firms to facilitate scoring and categorising companies against ESG criteria and once this framework is compiled, it can be transformed into a simplified, user-friendly interface to help clients engage with the issue. Rather than having to conduct their own research on each investment, investors can simply select the areas that matter most to them and let the wealth management firm’s views – or those of the data providers they integrate – guide their decisions automatically, using their preferences.

ESG impact investing: push and pull factors

Alongside the pull factor of increasing interest in ESG impact criteria, the industry is being pushed towards this more ethical and sustainable way of investing. Since 2018, there have been over 170 ESG-related regulatory measures proposed globally, more than the previous six years combined. Proposed changes to MiFID 2 aim to bring the regulatory rules in line with the EU climate action plan and are due to be delivered in the first half of 2021. The FCA has indicated that it plans to mirror these efforts. It may seem like a lot to take on board, but it doesn’t have to be complicated. UN Sustainable Development goals provide an inspiring and easily understood framework which can be transformed into a form of categorisation with graphical representation to make the whole process simple and user friendly for clients. The trick here is to ensure that perfect doesn’t become the enemy of good. In time, you may wish to drill down into those criteria in more detail, and so may your clients, but don’t wait too long to deliver or overwhelm the business or your clients with too much, too soon.

UN Sustainability Goals could be used as a framework to empower clients to select their priorities.

The best approach is to start small and add more detail in future when you can see where the value lies. Some clients may be happy with general goals that focus on green companies, for example. Other clients may wish to know more and tailor their strategy in more detail. Increasing a client’s agency not only to select ESG and similar criteria that matter to them but also how much detail they receive on the issue helps to build a more productive relationship. CREALOGIX offers a system of engagement for digital wealth services that allows wealth and investment management firms to offer their clients new ways to integrate ESG and impact criteria as part of a user-friendly digital investing service.

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