The rise of ESG Investing

I met a financial advisor for a coffee a few weeks ago. He wanted to pick my brains about ethical investing. He said he wanted to be 'more green' and wanted my advice on building ethical portfolios for clients. He seemed to think ethical investing was merely about avoiding tobacco and arms; it's moved on a lot, I said, as I rolled my eyes, questioning whether he was willing to be truly committed and informed about the world of ethical investing. I came across this great piece of investment research by Calvert Research and Management called 'The Rise of ESG Investing' which talks about the latest trends and client drivers. It also talks about financial advisors and their attitudes towards ESG. The study is US based. However, I think it translates well to the UK market too. I marked out some interesting bits and listed them below with my comments.

On Millenials

Born between 1980 and 2000, Millenials command wealth, a social conscience and power. By 2020, it is estimated they will make up 46% of the workforce. This is a generation with sway and swag, who hold social responsibility, social justice, equality and environment causes as top priorities.

Research quoted in the report states that 53% of millennials make investment decisions based on social responsibility factors, compared to 42% of Gen Xers, 41% of baby boomers and 39% of seniors. I don't see too many millennials in my advisory practise and I really enjoy seeing them when I do; but it is encouraging to see the younger generations voicing themselves so clearly.

ESG Takeaways

Advisers should incorporate basic ESG questions and filters into their initial discussions of goals and objectives with current and prospective clients and take a proactive approach to identifying needs and interests. 

I strongly agree. I don't push ESG investments as a 'right' or 'preferred' way of investing; it is not for everyone, and yet, the client has a right to make an informed decision - ESG or not. I imagine advisors enjoy offering a broader menu of options to clients and those who have worked hard to acquire expertise & conviction in ESG investing reap the benefits in attracting investors interested in responsible investing.

For many advisers, portfolio performance is a non-issue when it comes to ESG considerations. It ranks near the bottom of the reasons advisers utilize it; for non-users, ESG's limiting of investment options ranks near the top of considerations. Just 29% of advisers believe there is a positive correlation between corporate financial performance and ESG factors. While manager selection for ESG strategies may be limited compared to the broader universe of funds and managers, the menu is increasing in size. Overall, investment research broadly suggests that the performance of socially conscious funds has a "positive tilt relative to the overall universe of funds". While returns may not be a real hurdle, there is an increasing breadth of options - and potential strategies - that advisers can utilize.

Returns aren't a hurdle. True.

There are around 113 funds that meet the ESG/Ethical criteria as regulated funds for clients in the UK so yes, the universe is smaller. Also, the menu of available investment options excludes passive funds (there are a few, but they don't meet enough criteria to be included in any meaningful way) which means clients may pay a bit more for an ethical portfolio which necessarily includes actively managed funds and consequently higher fees than passive funds. However, more and more, I see a greater abundance of options including with company pensions, such as the L&G Future World fund focused on climate change, which is encouraging.

Adviser usage of ESG factors

The strongest indicator of adviser utilization of ESG factors was the level of client interest in social and environmental issues and, secondarily, the adviser's own knowledge of responsible investing as well as their performance of the importance of evaluating ESG factors for client portfolios.

I have met clients who are keen to invest ethically but then are put off by an adviser's own biases; I believe this is more to do with the advisers own level of felt competence in the area than the facts of whether ESG is an inferior strategy as an investment option or not. 56% of advisors cite client demand as the main reason to utilize ESG. Among advisors who don't use ESG investments, 58% said their clients are not interested in ESG factors, 29% said it leads to limited investment opportunities and 22% said it leads to poor or limited returns; I hear that last one most often too when I talk about it informally with advisor colleagues.

ESG factors brought up most often in client meetings

Among all ESG factors, the "E" - environmental - draws the most client interest. In our survey, 39% of advisers said that clean technology was one of the most commonly prioritised ESG criteria in client meetings, followed by climate change (35%) and emissions and waste (26%). 

An ethical investment questionnaire now has so many factors to it including pornography, human rights violations, genetic modifications, product stewardship and animal welfare.  It has definitely moved on from a simplistic negative screen of avoiding tobacco and arms companies. The survey also lists under social and governance issues the factors most frequently mentioned were human rights (22%) and corporate transparency (16%).

Knowledge stands in the way

Just 38% of responding advisers in our survey answered "Yes" to our question, "Do you feel knowledgeable when it comes to ESG investing?" Aside from client demand, advisers cite moral/ethical reasons as the secondary driver for their use of ESG.

38% is quite a large number. So, for clients who are looking to invest ethically or with ESG in mind, going to a knowledgeable advisor on ESG makes sense.

Further resources:

Ethical investing: Positive and negative screening criteria

Three myths about Ethical Investing

Sustainable tourism: A week in Morocco

Growing a Culture of Social Impact Investing in the UK

Book Review: Simple Wealth, Inevitable Wealth


“The mortal enemy of investment success is fear.” - Nick Murray I was fortunate enough to buy Nick Murray’s book The Excellent Investment Advisor early on in my advisory career. It made complete sense to me, stressing the role of an investment adviser as behavioural coach. I recently heard about Simple Wealth, Inevitable Wealth on a podcast with a US-based financial adviser, I bought it - a 1999 copy set me back about £25 and it is worth it!

Some of my favourite lines from the book are below with my thoughts:

“”Wealth isn’t primarily determined by investment performance, but by investor behavior.””

Numerous conversations with clients have convinced me that we have our unique perspectives and biases around investing which influence our decisions. A great investment portfolio needs to have global diversification, asset allocation, low costs, etc. Given a well-constructed portfolio, clients who have the ability to stay detached and take the long-term perspective with patience and discipline can usually achieve greater financial success.

On picking a financial adviser:

“Do not care what they know until you know that they care.”

Since you are trusting your financial adviser with your wealth and your family’s wealth, technical capabilities and competence can only take you so far. Trusting in your adviser’s judgment is important and so take your time looking for someone you can really trust.

On Risk:

  • “People greatly overestimate the long-term risk of owning stocks. People seriously underestimate the long-term risk of not owning stocks.”
  • “The great long-term financial risk isn’t loss of principal but erosion of purchasing power.”
  • “The real long-term risk of equities is not owning them.”

Here, he means stocks as an asset class. Important to remember you only invest in stocks if you can stay invested for 5 years or more. If you haven’t ever invested in equity, that would be quite risky behaviour, according to him.

On Investor behaviour:

“The single most important variable in the quest for investment success is also the only variable you ultimately control: your own behavior.”

I have to agree and love that this is within our control. You can’t control the markets, economic forces of nature or will things to go your way. You can choose how you react to all of it.

On the active/passive debate:

“At the end of the day, it isn’t indexing v/s active management. It’s cost.”

The cost of your portfolio has a direct effect on the growth of your portfolio - an important factor in portfolio construction.

Really enjoyed reading this book & highly recommend!

Are pensions better than ISAs?

Pension vs ISA

If you are saving for retirement and looking for better options than a pension, including comparing to ISAs, I simply haven't found one. As long as you can afford to invest your money, knowing it isn't accessible until 55 (or whenever the scheme rules say), pensions are undeniably the most tax efficient way to invest for your retirement.

A pension is simply a tax-advantaged investment wrapper. It's tax advantages are significant; the money you pay in is topped up by tax-relief. Moreover, the idea is to put money away where it cannot be easily accessed. So, the fact that it isn't accessible. I don't see it as a disadvantage.

Did I hear you say buy- to- let's are your plan for retirement? Please read my blog 'Dark clouds over buy-to-let investments' if you are open to a gentle challenge.

Not understanding how pensions work could hurt you financially. Here is an honest, genuine account from Jason Zweig, author of 'Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich', a book worth adding to the 'Money' section of your library.

In 1993, the mutual fund editor at Forbes magazine was contributing 5% of his salary, just half the allowable maximum, to his 401(k). When a friend asked why he didn’t put more into his 401(k), the editor shot back, “Because I can do better with my money than they can, that’s why.” Looking back more than a decade later, the former editor calculated how much this decision had cost him. I know the answer, because I was that editor. The cost of my overconfidence is more than a quarter of a million dollars- so far.

Tax Treatment (Are pensions better than ISAs?)

One area where pensions and ISAs differ is on the tax breaks given to individuals when payments are made, and when funds are accessed.


  • Money In: Pensions enjoy tax relief on contributions. For DC schemes, savers will typically pay in an amount net of basic rate tax, with the provider adding basic rate tax to the fund*. Any higher or additional relief is claimed through self-assessment. So a £10,000 pension contribution will require a payment of £8,000. A higher rate taxpayer would be able to claim a further £2,000 tax relief via their tax return, and this will reduce the tax they pay on their other income. So the net cost to an investor paying higher rate tax is £6,000. *Some occupational schemes will collect the gross employee contribution from total pay before tax is collected under PAYE. Employees will get tax relief at their highest marginal rates immediately and do not need to make any claims through self-assessment.

  • Money Out: Up to 25% of the pension fund can be taken completely tax-free. The balance is taxed at the saver’s highest marginal rate of income tax.


  • Money In: There’s no tax relief for payments into an ISA.

  • Money Out: All withdrawals from an ISA remain tax-free.

Source: Standard Life: Spotlight on Pension v/s ISA Other related resources:

How does an excellent IFA add value?

Humans can be their own worst enemy when it comes to investing. Also, everyone is not equal regarding their financial literacy or discipline, and an excellent IFA or independent financial adviser helps you to tune out the noise, keeping you focused on sticking with your plan. It 's hard to succeed as an investor without an understanding of one’s investment psychology drawbacks. A great IFA acts as a buffer between the client’s impulses or fears in reacting to the market; also as a behavioural coach, continually reminding the client to think in ways that will help them succeed with their goals.

I see my role as an investment adviser as follows:

  1. Helping my clients' have focus and clarity with their long-term financial goals
  2. Put a suitable and effective plan into place, one that can survive short-term shocks and volatility based on their own risk appetite.
  3. As my relationship with my client deepens, I ask open questions to help them understand their needs driving their fears and motivations in their relationship with money to help them have greater freedom in this area.

Sometimes a client wants safety, and low risk has ambitious plans for an early retirement and needs to increase her pension fund sharply. So, balancing a client’s attitude to risk as well as their capacity for loss along with their requirements to invest is not always easy.

I enjoy gently challenging my client's preconceptions and assumptions around investing, helping them notice the paradoxes and contradictions. We all suffer from cognitive biases, and this can muddy the waters when it comes to clear decisions around investing.

A central claim of prospect theory is that people are not consistently risk averse. Yes, they are much more sensitive to losses than to gains. But they are also risk seeking, both in their attraction to long shots and in their willingness to gamble when faced with a near-certain loss. To complicate things further, we know that people do not have a global view of their assets. They hold separate mental accounts and are much more willing to gamble from some of the accounts than others. To understand an individual’s complex attitude toward risk, we must know both the size of the loss that may destabilize them and the amount they are willing to put into play for a chance to achieve large gains. - Daniel Kahneman, psychologist.

Not having a clear financial plan can cause worries; reassurance is needed around a fundamental question ‘Am I doing enough to meet my financial goals?’ A great IFA helps frame investment decisions around the long term – reminding you to invest what you can while keeping aside funds in case of liquidity needs and emergencies.

Creating a comprehensive plan should address the following:

  • Creating clear, appropriate investment goals with realistic expectations
  • Developing a suitable asset allocation
  • Acting as a behavioural coach to maintain perspective and long-term discipline
  • Making changes to the portfolio when needed – rebalancing and optimising tax planning.
  • Ongoing communication, coaching and educating as needed

Action creates clarity, and an excellent IFA will help you create a suitable plan to work. It is getting you to your long term goals that count.



Diary of an IFA in London

In my diary of an IFA in London series, I write about my work week.

I know its going to be a good day when I don't check my emails first thing. I get my cup of tea in bed, made by my beloved husband who leaves home early and read the previous day's Financial Times in bed. I like to spring out of bed feeling excited about getting my goals accomplished - like I imagine Tony Robbins (US based life coach) does-on a good day. Today feels like an excellent day.

I usually clear my email inbox as part of my Sunday night ritual - I go through all my emails for the week, replying to anyone I haven't already, filing everything neatly into folders. It helps me feel ready for the work flow of Monday.

Mondays are a day reserved for admin so I avoid client meetings on this day. Monday mornings, I look at my list of activities for the day and tackle the biggest,baddest frog first. Frog, you ask? You  know, Bryan Tracy talks about your “frog” being your biggest, most important task, the one you are most likely to procrastinate on if you don’t do something about it. So, I get down to business - scratching items off my list as I go  along. I have 3 pieces of research that I need to finish - a large mortgage, a pension transfer with a portfolio with passive funds and a new pension for the director of a limited company. Nice and varied. The mortgage is going to take longest as I have to contact several different providers to scout for the best deal for my client.

Tuesday is focused on getting the best rates for this large  mortgage deal. My client is buying a home in Central London at a pretty price. I have rung around all the banks (that offer big mortgages) high value teams, then the private banks and a couple of the private banks are extremely keen to get this business. The credit teams at these banks tend to be cautious and want to see all paperwork beforehand...but I am organised and armed with everything they need. This work has taken all my focus today with various phone calls between me, the client and the bank offering the most competitive rate. I have politely declined meeting offers from the other provider wanting to pitch for the business; no point wasting their time at this stage.

Wednesday is focused on getting the private banker all the information he needs and the process is on its way, I  can now relax about this piece of work. They have met; the banker now knows the client is not a figment of my imagination. Lunch is with a client who I have been talking to for a while about transferring his pension across. We have known each other for years; the meeting is friendly and we are both quite engaged with each other, flitting from business to banter and back to business. Even though the trust levels are high, he asks me some tough questions and I answer, thoroughly convinced that my proposed solution is worth it. He likes the portfolio I have constructed with the least expensive passive funds in the market, he likes low costs, I give him a bunch of paperwork to read before he signs it after going through the mandatory bits with him and we set up a meeting for the following week.

 Thursday is busy, busy, busy. I have 2 client meetings in Canary Wharf followed by a third in sunny Shepherd's Bush. I agreed to visit my client in Shepherd's Bush as she has young children to pick up from school- its also not a long journey on the tube; I  enjoy reading my kindle on the tube, decompressing from meetings if you will. I don't own a car, I am a Londoner and public transport rocks. I am also frugal and cars are an unnecessary expense for me. The meeting goes well - the client asks a lot of questions, takes careful notes and we agree to meet again in a couple of weeks.

Friday requires me to be a human courier and rush some urgent documents from my client to the banker. A bike courier would normally do but having been scarred with documents being misplaced within departments in a large organisation before, I rush to do it myself. I have a few client phone calls, meetings to book for the following week, paperwork to print for next weeks client review meetings and then after that...its Friday fun. I meet a friend for lunch  - hey! I am self employed and choose my working hours... Lunch over, I head over to research ethical funds at the British Library. I love the library, I have a reader pass and spend many an afternoon speed reading through books and feeling inspired about a new blog post. By 6 pm, I return my books to the librarian and exit the British Library feeling good about a productive week and look forward to a relaxing weekend.