It is possibly a sign of unchallenged assumptions when clients in certain parts of the world show little interest in a topic that everyone is supposed to be concerned about. That is the case with ESG investing.
These days, we read much about how high net worth and ultra-HNW clients think ESG investing is a priority. And for younger individuals, this appears particularly to be the case – if you buy the narrative that is relentlessly trotted out.
It comes as a bit of a shock to find that in some regions at any rate, ESG isn’t discussed or mentioned at all by clients. Feedback from my colleagues who have been doing business in the Middle East suggests that ESG – at least in the most general sense – isn’t something that clients in the region raise in meetings or casual conversations.
There may be several reasons for this, not least that this is, after all, an oil-rich region in which people are understandably wary of what a decarbonised economy will look like. There has been the recent outpouring (with some hypocrisy and grandstanding by certain well-paid football stars, it must be said) of Western criticism of the Qatar World Cup over issues such as gay rights and treatment of workers on building sites. And the locals might think that this is a bit rich when the West is happy to import vast amounts of Gulf oil and gas and yet can’t bring itself to frack for oil and gas at home. (The UK being a case in point.) That, coupled with the Russian invasion of Ukraine and the spike in energy prices last year, means that the ESG bandwagon hit a few bumps recently – at least the “E” part of it.
Clearly though, whatever one’s views are about certain parts of the ESG agenda, this investment trend isn’t going away. We have had enough years of debate and data on the topic to know that ESG can and arguably should form part of the due diligence and risk management analysis that wealth managers use.
To some extent, some of this ESG shyness might change as a younger generation of wealth holders takes control of businesses in the region. Many of them are educated in the West and return home with a different set of ideas (a fact that has implications for wealth transfer, succession and diversity issues, for example). Advisors know that they must walk a fine line between heeding what their clients actually want and suggesting ideas about investments and practices that are gaining ground. It is the job of a smart advisor to “look around corners” on a client’s behalf and help the client future-proof their business and private wealth. It is therefore a duty, and not just a marketing gimmick, for advisors to talk about ESG with clients.
None of this means that advisors must preach some sort of message, or skate over the difficult areas, such as recent “greenwashing” scandals, for example. Nor must they over-sell ESG as involving no costs in terms of potentially lower returns. Trying to pitch a “have your cake and eat it” message about ESG is asking for trouble. Advisors must be honest, and explain that this is very much a work in progress, and that benchmarkable data, transparent information and reporting is not always easy to obtain, or as good as it should be. Care must be taken in framing expectations. And advisors must also go easy on the jargon.
The Middle East, for example, is a market where long-term relationships must be built carefully and cultural nuances understood. And there’s lots of potential for ESG to flourish if handled right. Within the framework of ESG, there are plenty of crossovers between certain practices under Shariah law and ESG. Shariah law prohibits gambling, pornography and alcohol – and plenty of ESG investors would concur with that. I have also noticed a trend elsewhere, such as in the US, of “faith-based” investing, through which advisors and clients try to follow Christian teaching, and where areas such as abortion, contraception, video games etc. arise. In all these cases, there can be some overlap with certain ESG ideas, although in others there’s tension. (Some ESG investors would disagree with limits on abortion or contraception, for example.)
ESG is, remember, broadly a movement that has come out of the affluent West. Ideas that appeal to a middle class, relatively liberal-minded audience might be a harder sell to someone who has only recently enjoyed access to modern comforts. Families in the Middle East, for example, can remember that only a few generations ago their families were poor. It is important that advocates of ESG remember this fact. Understanding history goes a long way.
Handled intelligently and with plenty of facts and figures, ESG conversations with clients can change attitudes. The dynamic must always be a two-way flow of ideas between clients and advisors – never a sales pitch approach on the one hand, and not being shy of sometimes saying “no” to a client on the other. Above all, ESG must be another aspect of the frank and hopefully productive conversations that good advisors have with their clients over many years.