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ESG investing – aligning clients’ investments with their values: Damien Lardoux, EQ Investors.

  • By Sue Whitbread

EQ is an award-winning chartered financial planning firm which has over 60 staff in London and 2,000 clients all around the UK. It is also one of the fastest growing wealth managers in the UK with a strong sense of being a member of a wider community. Sue Whitbread talks to Damien Lardoux, Head of Impact Investing at EQ investors, about how and why the business is so committed to sustainable investment principles

SW: Damien, can you explain to us why the integration of sustainable investment strategies is so important to your business?

DL: EQ Investors (EQ) is a staff-owned chartered wealth manager. Our ethical approach to doing business has won us the favour of clients across the UK. We are proud to be one of first UK companies to be awarded B Corporation status, an internationally recognised standard for companies that believe in business as a force for good. We operate a Matched Giving programme to help our clients and staff to raise extra funds for their favourite causes and we have set up the EQ Foundation as a registered charity.

The EQ Positive Impact Portfolios which we launched in 2012 are a unique proposition for investors who care about how and where their money is invested. The portfolios invest in funds which can show that they are supporting companies taking steps to achieve a social or environmental impact as well as a financial return.

The reason for launching the portfolios six years ago is that at the time, socially concerned investors could access solutions focused on negative screening, but we wanted to focus on the positive impact. The best companies have always been the ones that innovate, find new ways to serve real needs and solve real problems, and we wanted to capture these impact investment opportunities.

In addition to offering these to our own private clients, these are also available as a DFM service to IFAs via nine platforms.

SW: What about clients? How can advisers best manage the fact-finding process to ensure that clients’sustainable/ethical views are properly identified and integrated into the planning process?

DL: In terms of our DFM service, what really matters is the way the subject is approached by advisers with their clients. In our experience, a number of advisers avoid the subject for various reasons such as beliefs around underperformance, lack of confidence answering questions or additional complexity in the advice process.

Others tend to ask clients whether or not they have any ethical concerns that should be reflected in their investment portfolio. By phrasing it with negatively connoted words, clients can decline to pursue the discussion any further. Even for those clients expressing an interest, we have seen examples of questionnaires with up to 50 different questions which, as you would expect, can be quite overwhelming.

In our experience, clients engage a lot more with the subject when it is kept simple and positively phrased. For example, some advisers ask the following question to their clients as part of their fact finding process – “Would you like your investments to make a positive impact on society and the environment?” and the response is overwhelmingly positive. This gives them a fantastic advantage versus their peers. A survey last year showed that fewer than 10% of advisers are discussing sustainable investing with a majority of their clients.

SW: Is the sustainable approach considered for all relevant clients of the business or just those who have ethics or sustainable investment as a stated core value and objective?

DL: For the advisers we work with, the EQ Positive Impact Portfolios are one item on the menu which being presented to clients alongside other active and passive investment options. Obviously, for those that have expressed a strong interest for having their investments aligned with their values, our proposition either on a model portfolio or bespoke basis is usually a great fit.

Interestingly, a number of advisers see our portfolios as a good diversifier to other strategies they offer to their clients. The positive impact approach has been designed to take advantage of the many challenges that we are facing. We invest in companies which develop solutions tackling climate change, inequality or unsustainable economic development. As a result, our focus on innovative, high growth and profitable companies would significantly differentiate our proposition to more traditional investment strategies.

SW: How do you manage the process of fund/investment selection and asset allocation within the business? Is due diligence made more complicated with an extra filter for sustainability?

DL: Sustainability (impact) is a key part of our investment process. To start with, our asset allocation discussion will go beyond regional analysis and debate which themes are going to drive returns over the medium to long term. For example, we consistently debate on how the energy sector is being disrupted by the rise of renewable energy and its potential future impact on revenue and earnings growth.

Of our investment team comprised of 13 people, six are focused on fund research analysis. This is a key part of our process and again sustainability plays an important role. Indeed, there is growing evidence that embedding environmental, social and governance factors into an investment process can help decrease downside risks and improve returns overtime. Embedding sustainability within our process has helped us to have a more holistic approach and better understand future drivers of returns both from a sector and company specific perspective.

SW: Do you see a conflict between sustainable investing and maximising investment returns?

DL: This is one of the questions that we get asked the most. Often, there is the misconception that making a positive impact on society and the environment must come at the expense of performance. At EQ, we firmly believe the opposite to be true. Indeed, there is ample evidence that it can boost company profitability and your long-term investment returns.

Impact investing aims to invest in companies that have turned pressing societal needs into profitable, long-term business opportunities. The track record of impactful investments so far shows that they have the ability to outperform conventional equivalents and that their innovative business models are highly profitable – as we show in our second annual impact report.

Albeit a shorter track record versus traditional investing, the EQ Positive Impact Portfolios have outperformed their conventional benchmarks since their launch six years ago.

SW: What are your views on the future for sustainable investing? Is it a trend which will reverse or do you see it becoming mainstream in the near future?

DL: . The BBC’s Blue Planet series has raised awareness of plastic pollution and seen a shift towards reducing single-use plastics. Meanwhile governments are being pushed by activists and consumers to pay more attention to environmental issues. Increasingly individuals are now looking to make a positive impact by aligning their values with their investments.

The UN estimates that $5-7 trillion of investment is needed annually to solve the 17 most pressing global issues (represented by the UN’s Sustainable Development Goals) by 2030. The SDGs cover social and economic development issues, including poverty, hunger, health, education, global warming, gender equality, water, sanitation, energy, urbanisation, environment and social justice.

With an investment gap of approximately $2.5 trillion, impact investing is one approach that is needed to bridge this void.

SW: What would be your advice to other financial planning firms who may be considering the integration of sustainable investment into their business?

DL: It is clear that there is strong investor demand for impact investing. Looking ahead, as impact reporting continues to improve, it raises the prospect of a broader group of investors being brought in to the sector, attracted by greater clarity on how better social and environmental outcomes for society are fulfilled by their investment actions. We  recommend they get on-board.

 

About Damien Lardoux, Head of Impact Investing, EQ Investors

Damien has an MSc in Management from Reims Management School and an MSc in Wealth and Asset Management from ESCP-EAP Paris Business School. He is also a CFA charter holder, being a regular member of the CFA Institute and CFA UK society.

Before joining EQ Investors, Damien worked for Bank of America Merrill Lynch being responsible for asset allocation, security selection and portfolio construction. Damien now acts as the portfolio manager for the EQ Investors Positive Impact portfolios and brings an incredible enthusiasm for spreading the word about the benefits of impact investing.

Damien is a devoted sportsman, playing judo and squash on a regular basis. He also enjoys hiking, both in the UK and to places such as the Himalayas and Kilimanjaro.

 

 

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