We gather commentary on developments in and around the ESG investment space. In this instance, we interview Sanlam UK, the wealth management house.

The term “ESG” is now as familiar as any other in the financial sector. A lot of wealth and investment firms, as well as banks and insurers, use it when promoting investments and products. 

Regardless of what happens with the global markets and economy this year, the focus on more supposedly sustainable energy production, and for more open governance and accountability, will continue. In fact, some might see geopolitical/medical and related crises as making it more, not less, important to follow ESG approaches. 

We hear from the industry that there’s a need, still, for several things to make ESG more credible and robust, such as high-quality, digestible data for clients; more clarity about products and services; proof of real impact; avoidance of worries about “greenwashing”; clarity on whether there are capacity constraints with ESG that require funds/other to be capped to avoid diluting returns. 

In this interview, we talk to Christopher Halliwell, a financial planner at Sanlam UK, who has a particular focus on healthcare, medical and ethics issues. 

From your point of view, what is the best, most succinct description of ESG, and is this the one you show to clients? 
Narrowly speaking ESG is a set of criteria for selecting investments. These criteria are environmental, social and governance factors. This means screening an investment for companies which respect our natural habitat (environment), engage positively with their internal and external stakeholders (social) and promote positive leadership practices within a corporation (governance). 

This is somewhat of a textbook answer however and rather than working within this narrow definition, I start by asking my clients to describe what is important to them. This is at the centre of my financial planning approach for all my clients; understanding their objectives, mapping their beliefs and engaging with their passions - it’s also an important part of how Sanlam trains its financial advisors. 

Are you seeing a change in whether clients/advisors are the first to initiate a conversation about ESG?
The focus has dramatically shifted in the last 18 months; more clients have this objective at the top of their agenda or make it a priority discussion point. I ask my clients why this is important to them and for most it comes down to consistency with their core beliefs. One client I worked with did her best to recycle, purchase low energy products, cycle to work and avoided using her car. She was doing her best to make a difference but she hadn’t realised that her pension and ISA were still heavily invested in environmentally damaging companies which she tried hard to avoid in her everyday life. Despite all her efforts, until that point she wasn’t aware of the impact she could have by aligning her personal beliefs with her investments.

As far as the ESG acronym is concerned, where do you see the most potential for interest: environmentalism, society, governance? 
The climate debate is the defining issue of our time and is naturally the focus of most of my clients’ concerns. Outside more recent events, the environment will be the single largest challenge to face the world, requiring us to show the levels of solidarity, cooperation and mutual respect that we have shown through our most recent troubles. It can sometimes feel as though we are powerless in the face of some of the negative news we see regarding the environment, but our clients can make a massive difference to the world through how they invest. By voting with your capital you can make a change to the ESG issues you care about. Nothing moves global corporations, their boards and their CEOs’ pay like a shrinking share price and increasing costs on their debt due to declining interest from investors. We know that each client is unique which is why we work to understand their specific beliefs and then aim to map these beliefs into a suitable investment for their situation. 

Do you see the discipline of behavioural finance, which seeks to understand how human habits influence investment, as being useful in thinking about ESG, such as how people can allow biases to influence their views of certain business sectors and countries?
Behavioural finance is doing a good job of shining a light on some of our “biases” and “intuitions” - sometimes described as heuristics. As advisors, it is our job to act as mediators between these biases which can impact our clients’ decisions. In doing so, we can help them understand how biases can sometimes be damaging to their long-term objectives.

Here are some biases and how they can be overcome:

The present bias 
The present bias, can have a detrimental impact for our clients’ wealth. It is pervasive in all of us to some extent - it’s a focus on today rather than tomorrow. The Marshmallow Test conducted by Stanford University in California gives an example of how present bias can impact on our behaviour.

Stanford conducted an experiment in the 1960s and 1970s in which a group of 4-year-olds were each given a marshmallow. They were given a set of simple instructions. If they wanted to eat the marshmallow, they had to ring a bell and summon an experimenter. Alternatively, they could wait until the experimenter returned and earn two marshmallows - a simple reward for delaying their gratification from now until the future. Scientists found that those who could delay this gratification were smarter, more confident and had a healthier weight.

While simple, it’s clear that this bias affects us all to some degree in our daily lives. Our financial decisions are often affected by too much focus on the present and not enough focus on our future. This can cloud our judgement on present day spending habits, saving for the future or planning for our retirement. Thankfully there are some clever techniques that we can use to overcome this bias, for example, picturing yourself the day after your retirement; what does it look like? By imagining our social environment as well as the monetary environment, we bring the realism of the future to the present. So we can use the present bias to our advantage; by thinking and planning ahead we can calm uncertainties about our future. 

Optimism bias 
Optimism is needed, especially during a time of difficulty like our present moment. It is necessary for our personal wellbeing and for us to build for the future but unchecked optimism can lead us to a detrimental fall.

We encounter this bias most often when associated with our health. The impact of having a long-term illness or being unable to work can affect our emotional and physical wellbeing but it can also put us in a difficult financial situation. Clients must overcome the optimism bias that leads us to think that “this won’t happen to me” and focus on covering risks. In doing so, we can build a solid financial future, which is an essential part to most financial plans. We need to take steps to overcome this bias, such as visualising. Facing up to an honest assessment of risks and dealing with them whilst we are healthy is a great way for making sure that you are still able to achieve your long-term objectives.

 Advisors are here to help people overcome some of the psychological barriers we face daily.  

Currently there is a lot of volatility and fear in markets – how can ESG help frame investment and poise through such a period over the medium term?
The current health and economic conditions are creating a lot of understandable worry for families around the country. The loss of life, hardship and difficulty of this event have upturned people’s lives in a way that would have been unimaginable at the beginning of 2020. 

The principles of wealth creation, whether they are related to ESG investments or not, can be affected by our actions during these challenging times. Becoming aware of the forces that act on us can help to confront them and, like our biases, turn them to our advantage. One of these powerful forces, is panic. This is a psychological state which spreads quickly and acts on our brain to try to protect us. The downside to this state is that it clouds our attention and fixates us on short-term needs rather than our long-term objectives. Rising and falling markets are a natural part of investing, in fact they are built into our expectations and planning. By acting on our short-term impulses we can detrimentally impact our long-term objectives.

During this time, we should consult our investment and financial advisors to find the value in the situation. When others are forced to sell or run away from the market, professionals will be looking for the opportunities they leave behind to benefit clients investment portfolio and build towards their long-term objectives. Although this situation has created some short-term uncertainty, particularly over our health, we should consider how long we expect this situation to last. As with other times in history where human resolve has been tested, we have always surmounted the challenge.

There are more direct parallels between long-term stewardship with our investments, society and the planet requiring careful and consistent management over a long time period. Our environmental and social objectives are achieved through daily increments of hard work rather than overnight successes. In the same way, our daily successes by our investment and financial planning team can go unnoticed but the compound effect of these successes should continue to deliver a long-term solution. As an advisor, part of my role is to raise awareness of these biases and to help cultivate a focus on the long term rather than the short term to help my clients achieve the best outcomes possible for their situation.

If there is one final point you would want to make about the ESG trend, what is it?
As investors and consumers, advisors and clients, we occupy a very a privileged position. Our actions directly change the way the world functions. By considering how clients spend and invest money they can make significant changes to the way corporations are managed, to our stewardship of the planet and ultimately to the society we all live in.