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A view on RI/ESG: It's decision time in Wealth Management

What actions should wealth managers take?

If wealth managers were asked to name the defining investment trends of the last decade, that list would likely include responsible investing (RI). Yet while some wealth managers have responded to their clients’ growing interest in RI, others seem gripped by inertia.


Director, Head of Sustainability and Responsible Investment

KPMG in the UK


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According to Compeer’s annual benchmarking analysis, just 22% of wealth managers’ report that they’re executing clear plans. Over half (56%) say that RI is “an emerging priority, but plans are yet to be formulated”. Most damning of all, 11% responded that environmental, social and governance (ESG) factors are not a priority. Put simply, over two-thirds of wealth managers are behind the curve – and crucially, their clients’ expectations – when it comes to RI. In today’s competitive market, where margins are compressed and clients have an abundance of choice, this is a risky position to occupy.

This stance is even riskier when we consider that the future client base of wealth managers is changing. Research shows that over the next two to three decades, the wealth transfer to millennials will total $20-30 trillion dollars. And RI is a big priority for this demographic: 49% of millennials make their investments based on social factors. It would be folly to ignore this demographic – or to create a strategy that falls short of their scrutiny.

The importance of authenticity

When it comes to creating an RI strategy, authenticity is crucial to millennials. Simply offering a couple of ESG funds is simply inadequate. Not only are these investors informed, but they’ve grown up with social media – including the good and bad aspects of ‘call out’ culture. They’re going to question the authenticity of a wealth manager who claims to care about RI, but fails to integrate the principles of the practice into their own business. And if they’re unconvinced, they’ll vote with their feet.

Which wealth managers will thrive in the future?

Some wealth managers have already spotted the commercial opportunity in RI. They have embedded RI principles throughout their business, and crucially, they see themselves as catalysts of change. Such business leaders understand that capital markets will play a crucial part in solving key environmental issues, such as climate change. By contrast, those leaders who view RI as a fad, or merely as a sales proposition, will risk the long term sustainability of their business.

What actions should wealth managers take?

Firstly, RI principles should be integrated throughout the business – this isn’t just about having a group of funds as an afterthought. Secondly, wealth managers should be upfront about where they are on the journey. For example, your RI policy might not be fully executable yet, because of the quality of the data you’re obtaining from underlying companies. You can only hold a business to account to the extent that there is credible data available. If data is an issue, be prepared to discuss with your clients about how you are working with the investee companies or ESG data providers to gradually enhance the data.

Be able to articulate your stance on important ESG issues. If you’re taking the stance of investing in the transition – rather than shunning these industries – be upfront about this and where you draw the line on acceptable business practice. This is, arguably, a more adult conversation, and one that will appeal to investors who want to directly influence corporate behaviour. Lastly, talk about some of the areas where you want to effect improvement and how you plan to measure this impact. Your clients want to know both financial performance as well as the impact of their investment portfolio on the world.

In terms of the practicalities of implementing an RI strategy, start by conducting a gap analysis to identify areas of your investment processes and operating model that need improvement. Do you need analysed third party ESG data or will you do it yourself? How integrated do you want this data with your existing systems? Other essentials include reviewing existing third-party dependencies and reporting capabilities as well as the more intangible factors such as what drives behaviour of your staff and your firm’s overall culture.

It’s decision time. Why now?

Some sceptics might respond that RI isn’t a priority to their clients. Indeed, 11% of wealth managers are of that opinion. The problem with this stance is that in 12 months’ time, clients could be interested. And it often takes 12-24 months, at least, to fully implement the measures we’ve just outlined. A lesson learned by the institutional community is that it takes time to embed mindset changes within investment firms. Resource considerations are also significant. Dedicated professionals are required to help wealth managers implement their RI strategies – and there’s currently a shortage of these individuals in the marketplace.

Regulation is another reason to act now. We’ve already seen changes to MiFID II that will require asset and wealth managers to demonstrate that, during suitability reviews, they consult with clients on their ESG preferences and then implement these preferences into portfolios. And from October, UK pension schemes must report on how they’re factoring in ESG risks – including climate risk – into their investment decision-making. All things considered, wealth managers cannot be complacent if they are to benefit from the sizeable opportunity presented by RI.  

© 2021 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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