Schroders head of UK intermediary solutions Gillian Hepburn
As holders and directors of capital, financial advisers have a vital role to play in addressing multiple sustainability challenges, according to Schroders.
They also face an increasing push from regulators, with Markets in Financial Instruments Directive II rules now requiring advisers to examine their clients' sustainability preferences. At the same time, client expectations are rising. Advisers increasingly need robust tools to examine the sustainability credentials of their businesses.
Schroders has built a new ‘Sustainability Scorecard' to help advisers make this assessment and make changes to their operations where necessary. It uses SustainEx, which has been adapted from tools used by its investment managers, which helps assess impacts not measured in financial statements.
The resulting scorecard is designed to help advisers engage with clients in a different way, benchmark themselves against other businesses, maximise their valuations and attract talent.
The scorecard works on a debit versus credit system to achieve an overall score. On the credit side might be training, innovation or diversity scores; on the debt side may be carbon emissions or water use. Among the areas of assessment will be whether an office runs on sustainable energy, the extent to which it uses single-use plastics, or the adoption of carbon offset programmes. This should give advisers confidence when discussing sustainability with their clients.
Ensuring that there are sustainability options for client portfolios is another important area for advice businesses. Schroders has found advisers are making real progress in embedding sustainability preferences into their client assessments, with 72% shifting their processes to consider sustainable investing.
Schroders has built a sustainability framework for its multi-asset portfolios, which takes into consideration the two-way risk - climate impact and climate risk. It is embedded in the asset allocation, research and portfolio construction. This will incorporate an analysis of sustainability trends, specific sustainability-related investments and sustainability goals. Schroders also analyses specific sustainability risk scenarios.
A sustainability overlay may shift the dynamics of an investment portfolio and can introduce risks if pushed too far. The path to net zero - the point at which greenhouse gas emission match what we absorb - will not be instant. At the moment, setting a climate reduction overlay significantly reduces the list of available assets and skews the portfolio towards specific sectors and regions. As such, it can compromise the risk/reward integrity of the portfolio, so advisers need to be aware of these constraints when introducing a sustainability target.
Advisers need to consider the sustainability credentials of their business also. Schroders is providing an increasing range of support for advisers to help them benchmark their businesses and make improvements.
