Developing an ESG and Climate Investment Framework For Your Practice

Over the last few years, there has been a profound shift in the way investors think of environmental, social and governance (ESG) factors. The consequence is that ESG and climate portfolios are moving from an outlier to the norm. This presents an opportunity for financial advisers to offer a well-articulated philosophy, have broader conversations on these issues and support this with a credible investment approach and solutions.

Shifting Investor Preferences

Considerations for your Practice

Aligning financial advice with individuals’ motivations and values can be one of the most powerful ways to attract and retain clients.

ESG investing is rapidly evolving. As there are many shades of “green”, the process of building ESG and climate portfolios can be initially confronting. Taking incremental steps might be easier than one giant leap.

We believe that ESG and climate investing is a journey. We have created a practical framework to guide advisers in evolving and implementing an ESG and climate investment philosophy and approach. To get started on this journey, we list four initial considerations for your practice to reflect on. 

Determine ESG Context

  • Determine your practices’ views/convictions on ESG investing.
  • Identify the relevant ESG priorities for your clients and your portfolios.
  • How will you prioritise exclusions and integration? 

Set ESG Objectives

  • What are you trying to achieve? Client value, alignment, risk mitigation, alpha generation, regulation adherence or real world impact?
  • Does the ESG approach apply to all investor portfolios?
  • Degree of personalisation?

Develop ESG Investment Principles/Beliefs

  • Establish which ESG risks are most material to client portfolios and what asset classes are in scope for ESG integration   
  • Define an approach for evaluating companies in controversial ESG industries.       
  • Seek alignment with organisations with shared ESG principles (e.g. UNPRI).3

ESG Investment Strategy Selection

  • Set specific ESG criteria to evaluate investment strategies.
  • Select the optimal strategies that align with the ESG goals and preferences whilst maintaining diversification.

Constructing an ESG Framework

Once the above considerations have been acknowledged, the foundations of an ESG and climate investment framework can be formed. The framework is not intended to be a set-and-forget achievement. Client motivations will shift over time and the approach should adapt to changes in preferences, data, regulation and industry standards. 

Having a framework will provide a disciplined process for your investment decisions. Further, it can connect to your client value proposition and discussions around how you invest and the benefits of that approach. 

Five criteria to consider building into your framework include:

Acknowledging that ESG investing is an journey, we recommend outlining your practices’ ESG and climate approach under “Base”, “Goal” and “Ambition” targets against these key criteria. This allows for a gradual improvement over time, reflecting a pragmatic approach to ESG integration across a diverse client base.