Darren Lloyd Thomas is in regular communication with his clients about their ethical considerations, which should not only put his firm Thomas and Thomas, based in Pembrokeshire UK, in good stead for upcoming Mifid II sustainability requirements, but has also helped the firm build out its ethical offering.
Here, Thomas talks to ESG Clarity about his journey to more ESG investing, his clients’ concerns and respecting red lines, gaps in the market and why he thinks there’s a mis-selling scandal on the horizon.
You now have just over half your funds under advice in ethical portfolios, how did you get to this point?
I’m the son of a Baptist minister, so I grew up with people asking about consequences of stuff. I’m not being preachy, but I guess it was a bit more in my DNA. Also, I was very blessed when I started as a financial adviser I did pick up some clergy clients and they were asking questions right back in the 90s about not wanting to invest in gambling or pornography or arms dealing.
When Katy [Caine, client account manager] joined us in 2014 she was immediately asking questions about climate change, pollution, forestry and other issues, so we started to talk more about this. As we edged into 2015, we had ethical portfolios I’d built for our 12-ish ethical clients, so we started to look at overlaps.
We were always screening and we quite quickly found [ESG Clarity Committee member] Julia Dreblow with her Fund EcoMarket, which we find useful. What we had seemed like quite different portfolios for each person, but when we looked at the common ground we realised nearly everybody had more or less the same objections. So we suggested three portfolios – we have a range from one to five for our risk – and asked those 12 clients to shape what they would like them to look like, and found commonalities. Then we said to those 12, which had about £1m between them all, “would you like us to run a service for you that’s exactly the same as our mainstream Proactive service – our Proactive Ethical service – which also re-screens everything? Plus we’ll report back to you yearly and ask if your red lines have changed.”
All 12 came on board and that got us going. We didn’t charge anything to move them and we made that our policy for all our clients and always have. So now we’re somewhere around £35m [in ethical portfolios], which is great for a small firm.
With more clients coming into those ethical portfolios, have you noticed shifts in conversations about ESG?
Once a year we do a survey of quick-fire responses. We’ll ask clients to prioritise [the importance of their considerations]. Human rights time and time again hasn’t changed. But when we were hearing about child labour in China a few years’ ago, suddenly that was the top thing. Then when David Attenborough talks about plastic in the ocean, suddenly it’s all about climate.
However, there are core things our clients are always saying: avoid pornography, tobacco, fossil fuels, poor human rights and animal testing for cosmetics. Animal testing is an interesting one because that’s one a lot of ESG funds will push past, but we’ll ask questions like, why is Unilever in the portfolio? Because Unilever does animal testing to get into the China market. When you look deeper, Unilever is saying to the China market, “you’ve got until 2024 to allow us to remove animal testing”. So then we go back to our clients and say, “actually we’ve got a really good stock here, this is the situation, shall we give them time?” We ask, consult and educate our clients and say, “we can go for this fund that has wonderful wind turbines stocks in it, but it also makes AK47s”, so we have to have a common ground everyone can live with.
We then share that with the fund houses. We’ve got really good relationships with EdenTree, Rathbones and so on. It does help.
When carrying out your investment research, what are you looking for from an ESG perspective?
We start with our asset allocation, then when we’re picking the funds we’ll look at quantitative and qualitative analysis – these still have to be good funds. Then we screen. We like Dreblow’s approach, which is if the fund manager doesn’t have a published ethical policy, walk away. I think we’re in for a massive green mis-selling scandal, it’s coming our way. That’s why I think a centralised process where you say to the client, “I can’t promise you everything, but this is what I’m firmly going to try my hardest to do for you”, works.
Do you have any red flags for funds?
Don’t just go for the name of the fund. The ‘beautiful planet fund’ might have oil and the fund manager will say, “oh well we’re ‘influencing’ the oil producer to make cleaner oil”. But if that’s what your client is happy with…it’s all about choice. [Engagement] is a cop-out, it’s like me saying, “I don’t want to invest in sugar”, and you saying, “I’ve got Coca-Cola in the portfolio, but we’ve been engaging with Coca-Cola to reduce the sugar”. That’s great but I don’t want any sugar. You have to respect those red lines. We can’t control what fund houses do, but we’re going to study their ethical policies and ask them again and again if they’re sticking to them.
Where are there gaps in the market in terms of ESG funds?
With global exposure you can get sucked into so much US exposure, which we try to fight against in our portfolios because you just get dragged straight down the FAANGs stocks if you’re not careful, which has been great until about six months ago but the US story is not everything now.
If you want emerging markets or Japan you’re going to struggle to find a really well-screened, published ethical policy. Some advisers might go with the ‘done my best’ approach [in these areas] but I say, no if a client says they don’t want it, they don’t want it and if that means they have to miss 4% growth on the year then so be it, that’s how it is.
There’s only about three Europe ex-UK proper screened ethical funds, there’s one emerging market, which is JPM, there’s very few options out there. At least now you’ve got short-dated bond options, such as from EdenTree. Quite a lot try to go down the multi-manager or multi-asset route, but the first worry for the adviser is compliance – you can’t just bang £300,000 into one fund. So the fund houses need to work out how to enhance their options. For example, Rathbone Greenbank is fantastic, but it only has a couple of really good, solid ethical funds – Rathbone Ethical Bond, Rathbone Global Sustainability. But it has this amazing team so it would be really nice if it launched an ethical Japan fund or a Europe fund.
What do you think will be the impact of the upcoming Mifid II sustainability requirements in August?
It might help a little bit. I always try to get ahead of what I think is going to come and then I find I’ve gone too far one way and have to come back. But at the moment what we’re doing is a called a ‘discovery journey’ with our clients. We designed these conflicting questions – a bit like my analogy of finding wind turbines that also make AK47s, how do you feel? This helps us to filter at the beginning. We do find a higher percentage of clients will select a mainstream portfolio at the outset out the moment. That might sound disheartening but what it means is your more experienced investors, your sticky money, that’s the money that’s going into the ESG, ethical and impact space.
Thomas and Thomas has 55% AUA in ESG
| Example ethical portfolio (level three) | 16% UK Equity Income 18% UK All Companies 9% UK Corporate Bond 4% Short-dated UK Corporate Bond 44% Global Equities 9% Europe ex-UK |
| Percentage of assets under advice that are ESG | 55% |
