Suitably Sustainable?

In August it became a regulatory requirement for Irish financial advisers to assess sustainability preferences for their clients as part of initial and ongoing suitability assessments. This is being driven by the EU as part of their Sustainable Finance Action Plan.

Ultimately the purpose of this is to nudge allocators of capital, including financial advisers and their clients to have conversations about sustainability and consider it when deciding on where to invest their savings and retirement funds. This is just part of the multiple actions required to move the EU economy onto a greener footing.

One of the main obstacles to this sort of regulation being understood and adopted is the technical jargon and legalese in which it is communicated by regulators to participants including intermediaries, and the intent and impact of these new rules will be diluted and diminished if it just seen as yet another regulatory box to be ticked in order to have a compliant advice note on file.

The challenge for financial advisers therefore becomes how to put this into practical action that is beneficial to the advice process and the client whilst at the same time satisfying the regulatory requirements. How do you elicit preferences to quite subjective and complex concepts (or as Father Ted might call them, ‘ecumenical matters’) which result in practical and implementable suitability assessments and investment recommendations.

Luckily for advisers using PortfolioMetrix at Conexim the PortfolioMetrix Financial Personality Assessment tool has incorporated responsible investing preference questions since early 2021 – a full 18 months before becoming required by regulators. The questions attempt to gauge an investors interest in responsible investment which can then help inform them how much further to take the conversation with clients and whether a portfolio focused on sustainable investing is one that is most suitable for the investor. Looking at the wider market now, many providers appear to be scrambling to incorporate the new requirements at the last minute.

Let’s cut through the jargon, for most people a portfolio which largely attempts to allocate more money towards ‘good and improving’ companies and seeks to avoid ‘bad’ companies will be good enough. It is simply not practical for most people to be able to translate all their unique values into a completely bespoke portfolio, however there are vast differences out there between one ESG fund and another. And on top of this, the meaning of the word ESG seems to have become completely misused, but that is for another day.

What cannot be lost in all of this is that no matter what the client’s preferences, the resulting portfolio must still be solidly built around sound and timeless investing principles. There must be a sensible trade-off between risk and expected return with the objective being to maximise that expected return for each unit of risk taken. And investment portfolios must remain well diversified across sectors and geographies avoiding heavy concentration risk in one or two sectors or regions. These are the principles upon which our Sustainable World portfolios and US ETF ESG portfolios are built.

It is going to be interesting to see how the advice industry incorporates the new requirements over the coming months. One thing is for sure, the theme of responsible investing is only going to become stronger and more pronounced over the coming years.

If you would like a copy of our whitepaper on responsible investing please email