How to seamlessly integrate ESG in your investment advisory process

We do not see ESG (environmental, social, governance) as merely a simple data attribute; we see it as a way to introduce new dimensions when discussing investments with end clients. Therefore, it has to be implemented as an integral part of your investment advisory process, on par with other elements like asset allocation, performance and risk.

In a traditional portfolio review meeting, the discussion mainly focuses on allocation, performance and risk. Now, with ESG, an adviser can introduce new talking points and approach the conversation with environmentalism and sustainability in mind – topics that are close to the heart of the client. Furthermore, in a year with difficult markets, when performance is not necessarily a source of good news, a portfolio can still look positive from an ESG perspective, having been invested exactly in line with the client’s ESG values. This can create an emotional return for the client and bring a positive twist to a difficult performance discussion.

As a wealth manager, you can derive new business opportunities from ESG by proposing reallocations triggered by ESG criteria. This can lead to a substantial number of meaningful client interactions and subsequent transactions. However, to unlock this potential, the user journey must start with solid advice on ESG.

To reach a point where sustainable investing generates new business opportunities for your advisory business, you need to implement ESG as a tool throughout your investment process. Let us have a look at how this works in practice using the Avaloq platform.

ESG in the client profile

Ensure your tool for client profiling supports capturing ESG preferences. Clients should be able to express their accepted minimum level ESG score in a quick and intuitive way. We implemented this in the Avaloq investment advisory tool as a 1-10 scale.

When setting a client’s ESG preferences, it is important to explain to them the impact of their decision and highlight the respective investment trade-offs. A selection of stricter ESG criteria always limits the available investment universe. The higher a client sets his ESG standards, the harder it is to achieve a decent risk-adjusted expected return.

We visualized the shrinking asset universe as an intuitive spider chart, which dynamically reflects the chosen ESG preferences and their impact on the available assets among different sectors and industries.

A decent wealth management application should allow the selection of even more granular preference settings. In our profiling solution, a client can define different minimum levels for ESG criteria, each broken down into more detailed factors. For example, in the case of the environment, it could be emissions, resource use or innovations.

Furthermore, a client’s ESG preferences can be defined as hard or soft constraints and will be treated as such in subsequent stages of an investment journey. As such, an ESG profile has a similar effect on future investment proposals, as does a client’s risk profile, influencing many future investment decisions.

ESG in investment proposals

The definition of a client’s ESG profile is a welcome opportunity to conduct a health check and measure the existing portfolio against its newly defined ESG targets. Every portfolio health check could be a door opener to a new investment proposal, solving the detected health issue. To demonstrate the need for action, it is important to show the client’s ESG targets alongside their other goals, like asset allocation and risk.

When creating an investment proposal, Avaloq’s portfolio construction tool delivers instant feedback on all relevant dimensions, including ESG. The portfolio construction tool is designed to be used directly in client conversations, allowing advisers to react to client inputs immediately. Different proposal versions can be created, analysed and compared side by side – easily comparing expected risk/returns, stress tests, allocations and ESG impact. The ESG target achievement is depicted with a scale of five leaves, mirroring clients’ experiences in other settings. 

Our solutions also support your investment advisory by selecting the right instruments for a specific advisory situation. The “Explore” panel is the window to the CIO office and shows the house view, themes and recommendation lists of the bank. All content presented to the adviser in the “Explore” panel is customized to the specific advisory situation, respecting the regulatory profile of the client, target market, client location, adviser location, and so on. To select appropriate assets from an ESG perspective, the adviser is equipped with different filters that allow them to narrow down the asset list and find matching instruments that fulfil all the needed criteria.