Advising Australians on Sustainable Investing: Revealed Preferences #3 – Transcript

Dean Holmes
Welcome to episode four, sustainable investing preferences, high interest, but low understanding. Hi to everyone. Again, my name is Dean Holmes from the wealth network. And I’m leading the discussion today in relation to sustainable investing preferences. We’ve got two guests with us today, Adam and Bernard and they’ll introduce themselves shortly. What we’re going to do today is have a conversation around this category on four key areas. So firstly, the clients and what the conversations are that we’re having with clients or we’d like to have with clients, the research and how that’s going to help us be more confident over time, education, both for advisors, clients and the industry overall, and some of the challenges that we’re facing as an industry on how to be able to deliver this better. Firstly, I’d love to introduce Adam Drinkwater from Treysta Wealth, who’s our first guest, and then I’ll introduce Bernard over to you, Adam.

Adam Drinkwater
Thank you very much for having me on the podcast. Pleasure to be here. Yeah, Adam, Drinkwater, Senior Advisor and partner at Treysta Wealth. We are a self licensed advice firm, predominately based in Sydney, but offices in Queensland as well. We have clients all around Australia, and have been in business for about 30 years now and in the last few years have had a lot of activity in this space. So I’m very much looking forward to getting stuck into talking about it.

Dean Holmes
Excellent. Thank you. And Bernard Del Rey. Tell us a little bit about your journey.

Bernard Del Rey
Yeah, hello, everyone. This is Bernard Del Rey, I’m one of the co founders of Capital Preferences. We’re a technology firm that specializes in helping advice givers and advisors understand their clients preferences, and then action, those preferences in portfolios and investments that are a fit for them. And we have a special interest in the sustainable investing topics. So excited to be here today, Dean.

Dean Holmes
Excellent, thank you. So we’re going to start the conversation today around the client stories, because I think that that’s a great position to start, whether we’re leading it or the client is leading it, ultimately, we need to break down the work that we do into into stories so that clients take action. So Adam, how are you starting the conversation with a client in and around ethical investing, they usually

Adam Drinkwater
try and drive this through a values based process. And the key to that is the first part you’ve got to do is really, really understand the client that you’re talking to. So who are they and what are the drivers? What is important to them? And if they’re having a conversation with you about this, why is that? Usually there are very, very different reasons for each person. So they might have different interests, different experiences or a history around them that has driven this. So we tend to take them through a bit of a values process and get stuck into the why first, or why they’re even having this conversation. It’s so critical. And the better you can make that process or the richer you can make that engagement and The material that comes out of it, the better chance you give yourself, then when you’re designing advice, or you’re helping them understand things, to build out a really kind of tailored solution or make sure they end up in the right place in terms of what they would like. So our conversations are very much driven around who they are first, before we’re getting stuck into the subject matter and starting to talk about the detail at hand.

Dean Holmes
Excellent. And does that mean that they bring it up to you first or a use? Are you opening a conversation conversation saying, Would you like to talk about this topic?

Adam Drinkwater
Yeah, a bit of both. So if it’s a new client, and they’re coming in, it’s part of our process to ask this question. So we have a quite a detailed engagement process. And one of the key questions is whether or not someone has an interest in this area. So that always comes up as part of new client process for existing clients that generally raise it when I’m discussing an existing account. So, you know, in years gone by when most people’s accounts did not look something in this fashion, some of them do now. But for those that don’t, while I’m talking about accounts, I’m generally raising the subject as well, just out of kind of awareness. Sometimes people aren’t always aware that it’s an option for a start, we do actually have obligations to be speaking about these things as well, these days with existing clients, so you should be doing it anyway. So there’s probably a mixture of, you know, some existing clients will come in for a meeting and say, you know, speaking to a friend, or I’ve read about something in the press, or I’ve seen some marketing, can you tell me more about it. And for those that don’t, I will naturally raise it during the meeting as a conversation point and see where it goes, depending on what their responses because I have to get a mixed bag of responses.

Dean Holmes
Of course, of course. And one of the things that that I think is a challenge for us all is around sort of a call language to use, what are some of the language, the what are some of the words and languages that you use with clients to make sure that you’re being consistent with them over time as well.

Adam Drinkwater
So this is a really interesting point, because we are industry, acronyms and language in itself. And that’s no different to this area. So I everyone’s a little bit different, I tend to use responsible investing is more of an umbrella term, when I’m talking to people, there are obviously different areas under that whether you discuss areas like ESG, or impact. But really, when you’re having a an early part of a conversation, you don’t want to go too far down that road unless the client is really comfortable with that language. So usually at the start, I’m either talking in terms of responsible investing in some people are reasonably okay with sustainable. And the other part I would mention that, that I try and talk to people about is investing in line with what’s important to them. So really bringing the language back and just send you know, have you ever had any thoughts or any interests in direct in your investment choices to make sure they reflect what you would like not just a panel of options that you think are available. So that kind of really, really bringing it back. Because, you know, sometimes people don’t necessarily want to invest in line with some of the typical areas we see here. So we often talk about ethical choices or impact choices, but some people have really tailored investment choices they would like to make, which maybe don’t fit into this area. So it’s actually important to bring it back to that that kind of starting level, and then start to develop from that.

Dean Holmes
Excellent. And Bernard, have you, in your research, kind of come up with a level of core language that you that you think should be used?

Bernard Del Rey
We’ve spent a good deal of time trying to find the most consumer friendly way to allow the topic to be introduced to the broadest number of clients possible. And so we did do some research and work with MSCI looking at the 17 Sustainable Development Goals and and narrowing those down to five key areas that allow I think, to Adams point, allow a client to come into the conversation and feel smart, that they’ve got kind of a loose idea of where this could go. But you know, I think the challenge is as you go deeper and deeper, and wider and wider, you know, the number of options in the language does get quite intimidating. So we have we have spent some time with that and the design of, you know, software solutions that interact with consumers directly. I think the larger challenges that the one that Adams that people have, about 60% of Australians that are study have an affinity to doing something more with their money, they don’t know whether that means sustainable or responsible or at the coal or what. And then similarly, two thirds of those don’t really have a knowledge base of ESG concepts or negative screening or impact investing to do to take their preferences and action them on their own. And so that That’s really where obviously the advice community comes in and, and just, you know, broader solutions and technology.

Dean Holmes
Excellent. So Adam, how varied are the conversations? What’s a great if you can tell us a client story without the names? Like, what are some of the conversations that you’re actually having? And specifically, what are some of the questions that clients are actually asking you as you go deeper and deeper down this path?

Adam Drinkwater
I’ve kind of say, a high level of probably the two different conversations that I would have around this for those are interested in the area. One is a probably the most common answer I would get, which is, I just want to make sure that my money or investments aren’t doing anything bad, that’s quite a general answer that you, you would hear quite a lot or something similar to that. And that that in itself goes down a certain path, because it often means that they’re not really passionate, passionate enough to direct towards certain clauses, that just want to make sure that from a moral standpoint, they’re not doing anything that’s too bad. So things like ESG screening obviously fits quite well with that, because it generally tries to screen out the areas that most people would see as less desirable. The other conversation I would have is somebody that’s actually quite empowered around this or informed around it and has really specific interests. So you know, somebody might say, well, you know, I’m really passionate about climate change, that’s a broad church in itself, and you can go down different avenues from there. But you do get those types of people who will have a specific cause they’re trying to affect. So in terms of client examples, we’ve got one client is actually very passionate in that in that field, and wants to do everything right around it, but also wants to dedicate certain areas of his wealth towards impact in that particular kind of part of part of this sphere. I’ve got another example of a client whereby they want to help local causes around them in their community. And because of that, really niche kind of, you can’t do that through listed assets, or you can’t do that through portfolio choices. But what we can do is have a portfolio choice built, which does all the right stuff. And then we have a strategy around that, which allows them to tap out income from that portfolio and then go and use that income to literally walk up to those places and help with that money. So you know, they’re the ones that are really kind of certain on what they’re trying to do. And we help them go down the path of understanding what their options are around that. And like I said, if you get the first ones, which are, you know, just don’t want to do the wrong thing, or somebody I spoke to the other day was quite elderly and said, I do not want my grandkids growing up in a world where all these problems exist. So I at least want to know that my money is not associated with companies that have you know, tobacco, alcohol, that kind of thing associated.

Dean Holmes
And that speaking of that, grandfather, that’s an interesting thing about what type of client segments are you are you seeing that are demanded. So, Bernard, do you have any context in terms of the ages and stages of the conversations that people are actually requesting this?

Bernard Del Rey
We do. So in the in the research study, we did globally with 1800 clients and households, but in Australia, in particular, there’s definitely an age correlation. So, you know, I quoted 60% of Australian investors are interested in having their money do more, that’s higher in the 21, to 30, category at 65%. And lower in the over 50, category of 51%. And, you know, that’s not, that’s not probably too surprising to anyone. But that doesn’t mean that that’s a actual predictor, there’s just a correlation. So, you know, if you go into any of those groups, you’re going to find, you know, to Adams point, someone who is very passionate about a topic, and then also someone who’s not passionate about a topic, even in the, in the 21 to 30 category, for instance. So and just to Adams earlier point on kind of teasing out those finer implementation type of questions like, would you put someone in highly impact oriented investment or broad based ESG aware of type investments? You know, conversations get at that, and even the clients decisions get at that, as you as you look at how they would make certain decisions, you’re able to tease out those types of nuances, which I think is just a really exciting part of kind of the whole personalization process and in wealth that’s upon us now, where you have to take someone’s risk preferences, someone ESG preferences, you know, potentially the how they prioritize their goals, their legacy preferences and, and make sense of those. You know, it’s an exciting challenge from from a geeky technology and economist, type person like myself, well,

Dean Holmes
let’s take that. Let’s take that as the challenge and that’s my next question for you, Adam, how we act Slowly creating these solutions for clients. Because this is the next step of I’ve identified that a client would like to invest responsibly, I’ve now worked out the category of what they would like to include or exclude how I’m actually going to do this in my business with my other 100 clients that might have slightly different preferences.

Adam Drinkwater
Yeah, so every business is structured differently. So it kind of depends on how you’ve got your business set up. And what you’re able to do that from our perspective was self license, which is a very good starting point, because you’re not limited. As much as you may be, if you have a licensed framework around you, that doesn’t allow you to go into various areas of this, I think from there, then you need to make sure that you’ve got all the tools possible to get to the right outcome. So if you think of what Bernards talked about, and the systems that are utilized with capital preferences, we use a system called ethos as well. And having those tools at your disposal as an advisor, gives you the best possible chance to take the client down the right engagement path and get to the right end point. You’ve also got to arm yourself as an advisor personally, with brilliant information, education, and an understanding of this space and giving yourself time to be confident dealing with it. So you know, those two things are critical, even at a starting point operating within the business when you’re talking about clients. And then functionally to your point, how do you see all of your clients and do all this at the same time, it really depends on to what degree you start getting into the detail with each client. So even now, I’d say across my client base, I still have plenty of clients that don’t really have too much of an interest in this area. Some may find that hard to believe, but some people just still don’t, for one reason or another, find it a big driver for themselves. So it’s probably not at a stage yet where it’s really dominating the client base. But even if it was, we have we use managed discretionary accounts to kind of run our clients investment solutions. And that enables you to do a couple of things. One, the accounts can be run as simply as possible if if need be. So if a client just wants, like I said that early stage access to this where ESG aware, to Bernards point is essentially going to be a similar index to what most portfolios use, it’s just going to take away through negative screening, the assets that shouldn’t be in there, that’s probably not creating too much more complexity from an ongoing basis. It’s more so the clients that really want to get stuck into the nitty gritty of directing certain parts of portfolios to impact investments or carving out parts of portfolios to certain areas. And look, if that’s a client who wants to do that, and they want to engage more with you on it, then you just need to adjust your service accordingly to that client. And if you think through what value is to people, or what their outcomes are, we’ll talk about performance later. But a lot of clients in this space performance or value to them, is either engaged in at the right level, or getting the right outcomes for them in their decision making them their values as a person. So if that means that you need to allocate more time or change their service offering towards them, so that they get that then that’s probably a good outcome for them. So you obviously need to make sure that in your business, you’re agile enough to be able to deal with this and allocate the right amount of time to conversations, because there’s a as an area responsible investing probably takes a little more time in terms of engagement conversations, and what I would say more traditional areas have done in the past.

Dean Holmes
Yeah, absolutely. And we’ve got this, we definitely have this opportunity to lead the conversation with clients, if we know that 60% of our client book is actually thinking about it. The first step is obviously the business and yourself as an advisor doing the research before you start to have those conversations with clients. And then thinking how we can implement that within our business. And if it’s a simple solution that may be helps 80% of the clients and then there might be a more detailed solution that for those clients that need want to go deeper down the deeper down that journey. And just a question about that deeper down the journey out of with it with a the timing perspective under the MDA and how you do it. If a particular company changes their situation, so they move that something happens, and they’re less ethical than what they were the day before. How do you is that something you’re tracking? Or you’re leaving that with fund managers to track to say that that share is now needing to be pulled out of the portfolio?

Adam Drinkwater
Yeah, we predominantly use ETFs and indexes. So it’s almost done as a function for you in that regard. If a company isn’t in and can pick any ESG screen ETF, for example, if one company is an assumption and or a meeting the score requirements, they’re not going to be in it. So we don’t go as far down as individual stocks or individual shareholders I do in some cases where that is the need and there is nothing else at the index level that can meet Got criteria. But for the most part now, this is a really broad area in terms of accessibility of investments, and you tend to find that there should be a pretty good suite of the funds or ETFs available to people that they can access. And that screening is done within there to a certain extent, we still do our own work on it. So, you know, we still screened certain ETFs and certain funds, and when we sit down with people, we go through it again and make sure it’s appropriate for them to.

Dean Holmes
Absolutely, and the screening is quite interesting, because if you look at the top three, ethical, Australian, or international shares ETFs, their portfolios are actually quite different under the hood. And that’s just due to the their interpretation and their screening. Bernard, what have you found in this category?

Bernard Del Rey
Yeah, I mean, I think there’s three key steps to think about, and I not, I think they can be taken in sequence, depending on where your advice for him actually sets, I think the first is to try to get a good reading on your client base his preferences using some sort of systematic method. And, you know, I think that that that could be done before you have a proper product lineup, if you have the right relationships with your customers, you can say, Look, we’re interested in getting to know and do better by these, you know, in these ways can we can we get to know you a bit better. And we’re doing this with our clients as part of our annual review process. Once you have that data, you would know where your preferences lie in your client base, but at an individual level, once you have them, then I think the next is to go about the process of taking those preferences and mapping them to investments. And that’s where, you know, you need to, you need a data set on the investments themselves to be able to do that kind of matching. And then the third key criteria that we hear back from clients that they’re looking for, is some sort of closed loop reporting, you know, I’ve told you, I care about climate change, we’ve invested this way, you’ve told me I have kind of an 80% match in my portfolio with that, you know, now talk to me about the climate change dimension of the portfolio when we get together. And where I think the opportunity is for clients that are actually interested, only about one in 10 report that their advisor is actually ticking all three of those boxes, meaning a rigorous review of their preferences, mapping those preferences to a portfolio, and then closing the loop with some sort of reporting. And I think it’s just because the technology and the data is all still, in some ways coming together for the advice given community. And it’s probably furthest ahead now in Europe with some regulatory changes. But if you do all of those things, if you’re able to actually for people that care, do all of those things, and move them from a kind of a wanting experience to a fulfilling experience. There’s just massive, and PS benefits and referral benefits for doing so. So I’m just really excited as this comes together to see what that means for advice firms that actually get those three things in order.

Dean Holmes
Yeah, and the third thing is, is quite interesting, that sort of sustainable report that you could give customers are based on their own portfolio. Have you done anything in that regard, Adam, to present back to clients to show them the impact?

Adam Drinkwater
Yeah, so there’s a couple of things that we do out there. So one of the things I often advocate at a lot of people is the qualitative reporting rather than quantitative reporting in this space, and it’s not that they’re in either all but it means so much more to people when you’re able to articulate real world examples, real world stories of what goes on. So one moat a lot of people might have heard in the news AGL, for example, and the activism around that shareholder activism around that. Now, people want to know that their decisions are impacting things like that, more so necessarily, than just a typical set of performance reports. The other thing that we use, which I think is really, really useful is the ethos system we use has a kind of a real world metrics, performance or kind of portfolio analysis tool. So what that does is says, Okay, if you’d go and use this portfolio that you’re suggesting, in real world terms, what does that mean? So, you know, how many emissions or how many units of emissions Am I actually affecting, if I do this, how many fish in the ocean am I saving? Because climate changes and some of it sounds a bit tongue in cheek, but clients really resonate with it, and then it just brings it back to a level where they understand and second now I start to understand if I make choices, what happens in and around us. So that kind of report is really useful. So we update that at the same time and again, it comes back to who you are vacancy is part of the client. So an advisor skill set is to be able to understand your client, what is their level of kind of information and understanding around all of this? Are they happy with the complex language or not, and have the appropriate reporting to talk to them about those types of things. But that’s point, you know, closed loop and having them walk out or having them talking to people they know, knowing that they can answer the question of how their decision making has made a difference is the most important part for them.

Dean Holmes
Excellent, and that I like the breaking down the impact that you’re making to those specific examples, not social investing. But when the when the Tax Office changed the way in which they confirmed your tax refund. And they showed you how the your tax was spent in dollars and cents, it actually had a higher engagement with the with paying tax, if you can have a higher engagement with paying tax, but just by showing where your money went, it actually made people feel more comfortable through that process down to dollars and cents. And so you can do the same thing here of showing the the the impact that investors are making by their choices down to a to a very specific detail. It does give people more confidence,

Adam Drinkwater
but it’s psychological nudging, you know, so if you part of your role is if someone’s trying to get somewhere, you need to help them get there in the way they can understand the most. So, you know, the tax office doing that it just psychologically nudging people to do the right thing. You know, and it works. So it’s no different here, you know, if you, someone’s asking you to help them get somewhere, so to you to give them the best possible chance of getting there. And you’ve had the right tools to be able to do that and just choose which tools applicable.

Dean Holmes
Yeah, absolutely. So Bernard, we might change the conversation now into a little bit about the research that we’ve done. And you’ve experienced as well, just in terms of the if you’d walk us through the sort of the five categories of the ESG preferences that you that you went through, and sort of why the research fell down into these categories, first and foremost, and then what you learned through through that process, that would be that would be great.

Bernard Del Rey
Great, and I might just start a little bit top of house, what we what we were trying to accomplish and understand. So we conducted a study of 1800 clients that are working with advisers around the world and various geographies of which Australia was included, as well as the UK, the US Hong Kong, and we were trying to understand two things, one, where their their Where do their ESG preferences lie using a taxonomy that after testing, we believed kind of best could capture a global audience. And that taxonomy was to your specific question. Do they want to align their investments with investments that have contribute towards increasing diversity and inclusion, to addressing climate change, to helping put people first to protecting natural resources, and the fifth category was to companies that are have characteristics of behaving ethically, and underneath each of those five fall different sustainable development objectives and goals. And you know, there’s some education, but what we found is that you have to kind of start somewhere, and that was the best global way to start after some testing. And not surprisingly, people are unique, and they’re unique at an individual level, there’s some uniqueness at a geographic level. But for Australia, we found that you know, there wasn’t, there’s not necessarily a clear winner in any of those. And and that’s, again, not surprising, which again, points to this is ESG is not a product, or sustainable investing is not a product, it’s really an experience for an investor. It’s a it’s a personalized journey, revealing their preferences. And so I think I quoted before, about 60% of Australians have an affinity to do to do something more, only one in 10 are reporting that their advisor is delivering a high caliber experience, meaning that it actually ticks all of those three boxes, they have the right level of preference recovery, they under they have a portfolio to preference process, and that they actually get some closed loop reporting. So there’s an opportunity there but an exciting one. And I think only 38% feel as if their advisor, you know, right now has the tools to actually help them properly. And so I think everyone’s good Clients have very, very understanding of the situation and that it’s evolving. And it’s everyone’s doing the best they can. But I think with with the the marketplace exploding as it has, there’s just there’s just opportunity for some improvement here, which is, which is, again, I think, is the exciting part.

Dean Holmes
Excellent. And so the coming back to those three categories, so that the idea of identifying the preferences first and foremost through a through a particular process, which makes clients comfortable that they’re feeling that they’re on a journey. Second thing is we need a portfolio solution. Now, even as you were saying, Adam, that can be as simple as a portfolio of ETFs with with an ethical screen over the top of it. And then we’re trying to work on that third element, which is about how we’re getting that client engagement and reporting through through that, through that journey. Anything else in the research that stood out? Bernard that you wanted to share?

Bernard Del Rey
I think that clients understand that all their preferences cannot be fully met. I think they’re realistic in that respect, they would rather be understood, and be told that the portfolio that they’re getting is, let’s say, a 70% fit for their preferences, then B, I’m gonna call it individually greenwashed. And kind of, you know, told that they’ve saved 1000 bottles of water and this much of emissions, but really glossing over the larger alignment between the portfolio and their preferences. So I think they’re all adults in that respect. And so I think we have to, we do have to watch that engagement and reporting that it doesn’t overshadow their need to kind of understand that, you know, we’re, we have the right to 70% fit with your preferences. Now, if I see another opportunity to to gain greater fit for you, as new investments come online, as new products come online, I’m going to be working towards that. But that’s where we stand today, that they really appreciate that type of conversation. So that was just a, you know, I think in some ways, it’s, it’s scary. And we could sometimes fear that, but actually, clients seem to really embrace the truth of that.

Dean Holmes
And I think that’s the reality. I’m not sure, Adam, I’ll turn it over to you for the client experience. But the reality is, is that we still can’t recycle 100% of our plastic that comes into our house, but we might do our best efforts is that coming through in the conversations with clients in the end portfolios that we’re not 100% sure that every fun, every share is ethical. But we’ve got these screens and clients are happy at that base level.

Adam Drinkwater
Yeah, again, it’s an education piece when you’re talking to clients. So helping them understand to what level they are creating an impact, and through that choices, and, and you’re right, you know, this is a kind of ever developing area. And it wasn’t too many years ago, where it felt like not many people were engaging in this. And now it seems like lots of people are, so it really quickly takes momentum. So all the time, we’re seeing kind of new investments released or new ways of doing things. And now a really good example is talking to a client, the defensive space of assets is kind of something that doesn’t get the same traction in this area that typical growth assets do. And that’s because of many reasons, such as shares and shareholder power and that type of thing. So, you know, if I’m looking at a client’s account and talking to them, it’s likely that a portion of their money may not be able to impact this space, because of something like that, as well as the choices that they are making having a little bit of reality around it to say that screening is a certain methodology. You know, even if you look at a negative screened ETF, they will still have, you know, a kind of a tracking error, or maybe 10 20%, that will allow the bad performers to have some sort of function in there as long as it stays within an index. So there are conversations, if you really want to get into detail with a client about that same well, you can go, you know, as green as you want on something, but you’re going further and further away from the index that you’ve also told me you’re worried about leaving. So you know, you have to balance it out that way in enabling people to understand that they’re probably not going to be the, it’s probably gonna be a perfect solution to what they’re trying to do. And for each person, there are certainly a few trade off decisions that we’re going to talk through and trade offs are a huge part of our world. You know, if you want to have this effect over here, you’re going to move away from index or you might move away from a geographical region, lots of different standard conversations that we would have overlaid with the preferences that they have towards an area lies. Bernard,

Bernard Del Rey
no, I just would echo that. I think it’s it’s all about trade offs. You know, fundamentally, when we do the work that we’re doing, it’s about getting the client’s hands dirty, having them actually make decisions between, you know, diversification or deviation from a benchmark and greater achievement of ESG or sustainable alignment and seeing what choices they make because all Often, these preferences that clients have, they’re kind of they’re kind of buried inside of them, there’s not like, they can’t self report them very easily, they need to actually get their hands dirty and see what choices they would make. And through that decision making process, they’re both learning. Okay, actually, you know, what, I am willing to actually sacrifice quite a lot, you know, deviation from the benchmark, or I’m not, and that’s, you know, often people we joke, self report things that just simply aren’t trivial. And that and that you only learned their true preferences in the rearview mirror when it’s, you know, something bad happens. And they’re like, Wait, ESG is not outperforming Oh, I’m not interested in that anymore. Well, okay. Well, then I obviously misread your in economics terms, we would say your altruism preference, you know, I didn’t quite get that. And yeah, that’s where I think getting the clients hands dirty is critical through the process and those trade offs, Adam,

Adam Drinkwater
the engagement part as well, like you said, when you’re talking then to clients further down, the track is always going to link back to how well you started the process, because that’s where you get the quality of information and understanding about the person. So, you know, as an example of what you just mentioned, then the elderly couple dimensioned. In my earlier part of this, the first conversation started by the leading person in the partnership, who’s the happens to be the male saying, I really like the quality assets that I know and understand in the Australian market, big banks, and very kind of steadfast on that. It was only when we were having a completely separate values conversation with a pair of them about what was important to them that the female actually came and said, Well, I’m actually quite worried about our grandchildren’s future. She wasn’t talking about investments at the time, mentioned in that and I said, Well, can you tell me a little bit more about that when she started to speak about why it then started to link through to what investments could be possible and have an impact on that. And by the end of the conversation, the guy originally who hadn’t even thought about this was 100%, on board because he knew the impact it was going to have. So now when we’re having those conversations in review meetings, it’s linked back to that original point. And it’s linked back to why they made the decision. So when we’re talking about the accounts, or we’re talking about the impact that it’s having in qualitative reporting, they understand why they made the decision and whether or not that’s meeting what they originally wanted to do.

Dean Holmes
Excellent. And has this transferred into your own business as well, Adam, I, the journey to a B Corp, or net emissions or thinking even about the product providers that you use, in terms of conversations with clients?

Adam Drinkwater
Definitely, yeah. And at first years ago, it was a case of what can we use out there that does what we want. And even that, you know, years ago, was not easy, particularly if you were using existing platforms, or existing kind of providers, and they weren’t really on board with this. So at the early stage, we actually deviated away and had to do our own work, create our own portfolios, just to try and meet the criteria here of what clients were demanding, because we didn’t want to say no. So over the years, thankfully, that’s changed. And as we’ve gone to more and more providers and said that you need to get on board with this they have done which has been great. So certainly, you know, our own practice, we have changed our ways a little bit. And we probably moved away from what our model was, in the early stages to make sure we could do it. And now within our own practice, definitely we look at ourselves in terms of the way we behave. So even things reviewing like our own values, as a company, going through that going through our gender, mix in the business, and, you know, just thinking a little bit more deeply around it, you know, B Corp is is another kind of spirit itself. It’s quite detailed, and it takes plenty of work to go through that. So that’s definitely something that we had a conversation about. But yeah, I think it does. If you if you practice this so regularly, you can’t help surely but to look inside and say, you know, what do we do about these areas as well? So yeah, I think definitely, I think there’s an advisor as well. And as a person, it also does, the only point I would make there as well with people listening is we all have to be aware of our own biases. So you can often be talking to clients about this particular space, you might have a view on it or not. And you also might think, something completely different to what the client speaking about. So it was good to remember that as a business or as a person. We may do things a certain way. But we’ve always got to try and remove any biases and beware of blind spots so that we are giving the best that we can to people.

Dean Holmes
Yeah, absolutely. So part three of what I wanted to talk to you gentlemen about today was how can we better educate three categories of people as I see it, so how do we better educate the advisors and how do we educate ourselves in that regard? How do we how do we begin to educate clients and then finally away we touched on it the industry and the providers in this in this category as well? So let’s start with advisors. Adam, how are we how do we better learn about these As areas,

Adam Drinkwater
listening to podcasts like this. So myself, I think over the years of doing this surrounding yourself by the right people, the right sources of information has been critical. So, you know, funnily enough years and years ago, we actually went out to the states, and visited Shahar and capital preferences. And that seems like a long time ago now, but at the time, that was probably one of the better ways we could get exposure to this. And now, I think there’s much more of that around us here in Australia, you know, Ria, the Responsible Investment sociate, in Australia, I consume a lot of information, they’re excellent at the way they do this, they put on great conferences, put out great updates, and if you engage with them and become a member, they’re a brilliant foundation of information to consume. So, you know, as an advisor, it’s up to you to better yourself in this space, no one’s perfect, no one’s gonna make you do it, essentially, what I was gonna bring the information to, so consuming the right information, either by your peers, finding out who does this well, or who does this to a really high standard? And what do they do, you know, going out there and having conversations about it, and then getting exposed to places like Rio, where you’re going to have those conversations, you’re going to meet people that do this well. So that’s what that’s definitely something that I’ve noticed over the last few years is immersing yourself in those spaces, will allow you to kind of a better standard of learning and keep testing yourself as well on it. So

Dean Holmes
Bernard, what what do you think we can do to better educate advisors?

Bernard Del Rey
I mean, I think it’s, I think there’s two parts, there’s the subject matter itself, which I think first, you don’t have to become an expert overnight, and it won’t actually work. So I would take the pressure off there, but putting yourself on a learning and development plan. If this is an area of interest, particularly if you’re, you know, you’re looking to the future, and you have a client base that’s changing, and there’s intergenerational wealth transfer, I think there’s a good use of your investment, just kind of getting involved, as Adam said. And then the second I think, is the quote, unquote, on the Business Challenge, which is, how do you have those three things put in place preference recovery, preference to portfolio alignment, and metrics you can cleanly report because I also think the cleaner that preference to portfolio alignment reporting is, you know, the less pressure, I’d argue you have to then put on yourself to become the ESG expert, because you’re, you know, the data is someone doing it for you with all the vagaries of the data known. And then the third is that the closed report reporting, so I think that’s an on the business challenge that needs to be put on the boardroom table for soon if it hasn’t been yet. And then there’s the year old learning and development path, and there’s just, you know, like everything, there’s no real shortcut.

Dean Holmes
Yep, absolutely. And so next category of clients, how are we going to continue to educate our clients in the the preference of one to many communication first item? Like how are we going out to current existing clients invest, regardless of their investing preference to open this category up? And then what education you’re giving, specifically to individual clients on the ground in the inner meeting?

Adam Drinkwater
Yes, I think is actually happening for us. If you look about these days, I think every Superfund is marketing themselves as a specialist in this area. And that’s probably a sign in itself of how much it’s developed over the past few years. So, you know, depending on which media you consume, or how you digest information, I think it’s a lot of marketing going on now around this space. So that doesn’t necessarily mean clients are being educated. It just means they’ve been taught to or there’s a lot of noise around it. So often, then, helping clients understand what that means is they’re really interested in past that does drive conversations as more people coming in and asking about this topic, which is a good start. But the education part is really then understanding from our perspective, when we’re going through that engagement. How much does this client understand when they’re asking this question? Do they understand the basics of it? Or do they really, really, you know, not understand the core principles, and you need to spend a bit of time educating them on it. So when we serve, systems, preference conversations, that kind of thing. We do have educational videos that we use as well. And we ask clients to view this is something when you talked about UK and Europe, they’ve done for a little while by rule. And I think it’s a really, really valuable way to do things. So we do give clients video information to help them then answer questions rather than doing it from a lesser informed viewpoint. The other part is if there’s a client that wants to learn about something or is asking about it, but doesn’t know enough, then it’s kind of on us to help educate our clients. Now, one of our value propositions in this business is to educate our clients and we do it on an ongoing basis. The reporting we do on an ongoing basis through information we send out to clients on a weekly or monthly basis, but If a client has a gap in their knowledge that needs to fulfill it, and then it will either provide literature to them or you know, spend time and find a book that works, if that’s what it’s needed. So I think you can kind of go to different degrees of doing it, depending on what your philosophy is as a practice, and how much time you have to do that. But there is every bit of material out there to help educate clients on whether it’s given them podcasts or listen to or that type of thing. And of course, it depends on how much they want to learn on it, too.

Dean Holmes
Absolutely. And that’s ideally, Bernard, in terms of understanding preferences first, can then lead to better education, because at least you start to drill down on what areas the client would like to learn about.

Bernard Del Rey
Yeah, I mean, I think there’s a great example out there, if, you know, for the audience, if they’re interested, if you were to go to my ESG id.com, which is a JP Morgan solution, clients can, you can put your clients or clients can go through and kind of, they reveal their preferences, and then they kind of get a persona, and they can see the relative importance of the various things that are out there as investable. And then from there, it gives you a bit of center of center of gravity to kind of go down that education path that Adam mentioned. So that that’d be one example. But I think, yeah, I think helping clients connect to their preferences, and explore them in some structured way is probably a good, good place to start and make it efficient. Because if you just email everyone, the climate change white paper from wherever, you know, you’re probably not, you’re not gonna get a direct hit every time on that. So does

Dean Holmes
that. Absolutely. And what about the industry overall? Adam? What is the what are the let’s call them the product providers? What are they giving to you? Or what would you like to have more of, in in this to help you with your clients?

Adam Drinkwater
An open ear is probably the best thing I would say. So I know, I know this, because the ones that have done very well, at providing the right things are the ones that engage. So if someone’s willing to engage, and listen, because we’re at the front end of this, they’re not necessarily so we’re the ones that have the client conversations, we hear the client feedback, we see the we see ourselves what works and what doesn’t work. So if you’ve got providers that are willing to sit down and listen to that, and take that away, and kind of develop themselves, that you tend to see successful outcomes from that. And that’s what we’ve had in the past for certain ETF providers or certain platform providers, we’ve told them, what we’re seeing at the coalface and what needs to happen to keep pushing forward, and they’ve gone away and advanced around it. So I think that’s one of the biggest areas of engagement that helps industry providers improve here. And obviously, they’ve got a wealth of data and research available online that everyone does anyway. But I think the power of the conversation that happens with the client is the thing that is most important for providers to understand, because ultimately, that is who they’re supposed to be providing for

Dean Holmes
apps. Absolutely. So the last bit today, gentlemen, is all about helping the listener understand about the challenges. And now these challenges might be some of the reasons why they haven’t jumped into this area already. But also some of the challenges that the industry and regulation might have with us over time as well. So firstly, the most popular one, I think that comes up when you’re talking about this is just performance. So the moment you change and allow for client preferences, you’ve guaranteed a variation in performance, whether that is positive or negative. We don’t know until we look backwards, but how it’s one of the challenges that I hear so Adam, how have you, as a business thought about this? Is there an outperformance or underperformance? Or does it not matter when you’re having more meaningful client conversations?

Adam Drinkwater
is probably not want to answer to this, but most of it is a question that comes up more often than not from clients is if I do this, what is the difference on performance? You know, my numbers going to change? So you can’t answer that in a hallway and say yes or no necessarily, because it depends on where you’ve gotten to in terms of what they’re trying to do. There is lots of available data now and more and more so as investment solutions developed. So lots of our portfolio choices that we’ll use will offer a benchmark to the non ESG, or the non screened or non tailored portfolio to the one that you’re looking at. And you can usually see 1357 years what’s the difference been? If that helps provide some context, it’s certainly not the best way of looking forward because it’s such a change in space. But if you can explain to people what changes you’re making to somebody’s portfolio, it can also help with their so to the point earlier, if you’re removing someone from a major index, and you’re putting them somewhere that’s really obscure, you then need to be aware that there is a chance that they’re going to see some very different numbers so you can show them correlations and show them the difference over recent times just to help them have a bit of an eye Understanding. But I also think that to finance kind of point earlier, they have to be aware of the trade offs that are taking place here. And also, what is performance to a person. So, and this applies to all of our clients across a wide range of areas, performance is really different to each person. So it’s performance to someone having their portfolio wonderfully closely matched to their values, and not necessarily about numbers, or is it that they want really close matching, and don’t mind a little bit of change that so these are the questions you have to ask because otherwise in a year or twos time, and you’re sat in front of the client and sat in front of the portfolio, you get into a difficult conversation if you haven’t had these propaganda, educated conversations up front. So that’s kind of the work that goes in, I would say, at the start during engagement. And then the closed loop nature, which again, Bernards touched on so many times, and rightly so is then helping people understand what impact really has this had. So if you’ve gone out there and made these changes, has it solved the value gaps that you had as a person or in your own kind of world and come in and ask him about this? And also, what difference have your choices made? You know, have you had shareholder activism in certain companies that has made a great change? And you’re really pleased about that? And that’s what you wanted to see? or have there been certain companies that have been taken out of major industries, because the power of negative screening has removed their behavior from that industry. So you have to understand what the clients looking for in order to then understanding what performance looks like to them. But I certainly think qualitative is a really important part of this area. And it’s something again, we’ve gone back to providers on and said, I don’t want you regular updates here. On portfolios, I want different types of updates, because this is a different type of area. So I want to understand of choices that have been made. What are the qualitative data stories coming out of it, to help people understand that this is a very relevant field for them?

Dean Holmes
Absolutely. And, Bernard, in your research, did this come up from either the clients or advisers about the concern about underperformance as as an element?

Bernard Del Rey
I think, absolutely. I mean, to Adam’s point, we’re all we all have a different reference point, you know, if I have a house, and I’m going to sell it, sometimes it’s the reference point is what I bought it for. And sometimes it’s what the neighbor sold their house for, right. And those are two different reference points and produce two different results, the same portfolio. So I think, you know, with my economist hat on, it would be something you’d want to test, not just Converse on, meaning, I want to see you make decisions between deviation from a benchmark and improvement in ESG characteristics with different structured trade offs, so that I can actually measure how much tolerance you have for that deviation versus solely relying on your words. Because again, I think this is an area where people actually can’t self report very, very well. So it’s a little bit tricky. And I do think some of the regulation in Europe, for example, is trying to bring in some more stringent documentation into the advice process and Europe at least. And I would not be surprised if that eventually makes its way through into, you know, into Australia and elsewhere. When the time is running for

Dean Holmes
Absolutely. So you open the can, which we were going to talk about anyway. But the EU have brought in some pretty specific regulation, I think, at the at the fund manager level, essentially, around this article 789, and what what level of green, each of those would be. And so I think that he use the furthest ahead in this journey. Can you talk to us just a little bit about what these different articles which are trying to do not work? But also then what might the impact be for actual how the fund managers have taken this information and what their concerns are?

Bernard Del Rey
Yeah, I think there’s two parts. So I think there’s there’s regulation at the fund manager level, which are noted, but there was also regulation now at the advice giving level and client interaction level. So the the first to your point is trying to bring some uniformity to the classification of funds so that not every fund is green, so to speak. And so that’s where the seven, eight and nine come in with nine being better than seven. And so you can, there’s lots of reading you can do there. And then on the advice side, it’s a process a more advice givers must have a documented process to not only offer ESG solutions, but somehow assess which is the difficult part. What fraction of a member of a client’s portfolio should be invested in ESG given their preferences, and do they have the stamina slash willingness to do deviate from benchmarks or pay higher fees in order to make that impact. And it gets a lot more complicated than that. I mean, the MiFID regulations for advice givers are far from friendly. We’re working with firms in that geography, it’s, you know, it’s in an attempt to make things better, they’ve made things quite difficult. So it’s not a client friendly, or intuitive process in Europe right now for advice givers to actually recommend investments. And then similarly, you know, given the classification system and the need to kind of get your fund in a box in one of those boxes, it’s also created some perverse situations with the products that so in some ways, we should feel ourselves blessed here in Australia, to not have that, but I think the best parts of that will eventually end up in some of the Australian regulations that we see developing.

Dean Holmes
Absolutely. And that would be the the ASIC has brought a recent case for for greenwashing. And I think they’re doing a little bit more work in this area, but they haven’t yet evolved it to the to the financial advisors, they may be on that path as the second element Bernard, in terms of creating a rulebook for advisors around this, I think it’s a great opportunity that from advice, practices perspective, they’ve always had an investment philosophy. And often they’ve documented that investment philosophy. And probably there’s time to document a philosophy of responsible investing philosophy, that could be a one or two pager that a could go to clients and be client friendly, but be really, for the advice practice themselves to hold themselves accountable to some type of philosophy in this area. Adam, have you documented anything in Tristar about your investment preferences in this way,

Adam Drinkwater
we do have investment philosophy information that we talk to clients about No, it’s on our website, and same for this space as well. So we talk about ESG work that we do, and have done with clients so that people are aware that it’s something that we’re open to the for me the philosophy part of this is so broad, because, again, in Australia, if you think about the framework that Bernard has talked about, and especially over in Europe and the UK, here, we still have best interests to meet around clients. So if you’re talking to a client, you’re going to understand what’s in their best interests. And really, in this space, that philosophy can be really broad ranging. So for what’s right for long client can be really, really different for what’s right for another. So as a practice, one of the things philosophically for us to make sure is that we use the right platforms are we use the right tools that allow us to give the broadest sets of advice or the kind of broader span of help for people so that we’re not limiting what we’re able to do. If you are limited, if you can only give limited information on things that you hold your hand up. And you kind of say that this is our area we specialize in. And that’s okay, I’m not saying that’s incorrect. It’s just that for us, I think we try and through the structures that we have, particularly for individually managed accounts, we can kind of do anything for any one person’s account. So our philosophy is to be able to do that, and be able to try and help as many people in different ways that they need, rather than not being able to not be able to do that necessarily. But again, like I said, we we still have to comply by advice frameworks here, it’s got to be in their best interest, you can’t go doing things or putting them in certain places that aren’t meeting the requirements of what they’ve asked you in the first place. And that comes back to that engagement process. Are you meeting what they’ve asked us to view when you first had that conversation?

Dean Holmes
Yeah, absolutely. So well, well said. So there are a couple of the challenges that that we face, both now and into the future, in relation to responsible investing. So So in conclusion, I think the My Favorite takeaway from today was just documenting those three things are burnin in terms of identifying preferences, having a portfolio to deliver to those preferences as best as possible. And then finally, implementing some type of reporting off the back of that. So clients are aware, A, that they are investing responsibly, and then some, to some extent, what the impact they’re having on on that. Adam, any last words for the for the listener in terms of what what they should do next, in this journey?

Adam Drinkwater
Yeah, that’s similar to the points there. But you know, don’t be put off by this space, if it’s something that you’re not overly aware of yet, or kind of really well educated on because there are so many different avenues of entry to upskill yourself in this and, you know, like I said, even joining associations like Rio, all of a sudden you can have a lot of material available to make yourself a lot more confident about this space. To your point. The quality isn’t the engagement work that you do at the start. Undoubtedly, it’s about having the best solutions to win Do you do that engagement work, you can speak to clients and give them what they need. And it’s about then the closed loop reporting coming back to people and saying that these are the outcomes do we need to change it or not? And you’ll get confidence in doing all of those things. If you immerse yourself in this area and continue to learn more about it, it’s not as big or scary as it can appear at first. I don’t think so. You know, it’s just about going out reaching out to the right people and being a bit kind of vulnerable, expose yourself to be able to learn something new and different if you need to.

Dean Holmes
Excellent. Thank you, Adam. And Bernard, for the final words. What’s your last message for advisors today?

Bernard Del Rey
I think, you know, we would say ESG is personal. And it’s an experience, not a product and every advice giver that I’m sure is listening to this today is an expert at delivering a tremendous experience to their clients. So embrace that philosophy with this topic. And, you know, use some of the guides on what a good experience looks like. And I think you’ll, you’ll be where you want to be sooner than you think. So. Good luck.

Dean Holmes
Excellent. Thank you, Adam. Thank you, Bernard, and enjoy the rest of your day.

Bernard Del Rey
Just thanks for having us, Dean.

Adam Drinkwater
Thank you. Take care. Okay.