Five Questions Wealth Managers Can Ask to Help Understand and Approach ESG Investors
Greater numbers of investors than ever are becoming interested in Environmental, Social, and Governance (ESG) investing. As a wealth manager, it’s important to understand your investors’ priorities and thinking so you can guide them to funds that align with their beliefs and investment goals. We convened a panel to answer some of the more common questions from wealth managers about how to offer excellent ESG investment advice.
How Do I Learn What the Real Values and Priorities of an ESG Investor Are?
There are several approaches you can take.
Listen to Your Client and Ask or Infer What Matters to Them
Talk to your investor to get an idea of their real values. If they express an interest in community wellbeing, climate change, or carbon footprints, explain the concepts of impact investing. Track your conversations over time in a CRM, and extract data from the tool to identify potential ESG opportunities. Ask questions of your client about how their ESG thinking balances against their desire for high returns.
Explore Whether They are Already Making ESG Decisions
Review other investments in their portfolio to see if they’re already making ESG choices, even if they don’t know it. For example, if they are avoiding fossil fuel companies or arms manufacturers, or investing in corporations with better environmental credentials.
Present Some “What If?” Scenarios about ESG Investing and Returns to Understand their Reactions
Create some investment and return models comparing ESG investing to other approaches. Talk through each of these with your client, and focus on areas like diversification, asset allocation, risk reduction due to strong governance, and similar areas.
Is There a Broadly Held or Universally Accepted Agreement or Standard on ESG Investing?
No. Although certain areas of the world, like the European Union, are introducing environmental and other criteria, there are no shared standards on how these frameworks apply to investing. Instead, wealth managers will need to do some of the legwork to match an ESG investor’s priorities with funds that meet those needs.
What Are My Options for Applying ESG Investing Criteria on Behalf of My Client?
For investors that want to dig a little deeper into the impact their ESG investments are having, we recommend a “thematic” approach to suggesting funds. For example:
- Clean energy funds that seek to replace fossil fuel with wind, solar, and other energy alternatives. As the European Union embraces a Green Deal, and there’s a greater focus on climate change, these funds are worth exploring.
- Ethical supply chain investments that support corporations seeking to reduce the environmental impact of how they source raw materials, manufacturing, and finished products.
- Divesting from “sin” stocks like weapon manufacturing, the prison-industrial complex, tobacco, or alcohol.
Additionally, you will want to explore inclusionary versus exclusionary ESG investing.
Inclusionary ESG Investing
Inclusionary ESG investing starts with a “blank slate” and then specifically seeks out individual stocks, funds, and other assets that align with a client’s needs. This approach helps ensure that a client is not “accidentally” investing in more problematic corporations. At the same time, it may also reduce their returns due to not investing in promising “ESG-neutral” businesses. It’s worth exploring this approach with investors who see ESG as a high priority, and are not quite so concerned with high returns.
Exclusionary ESG Investing
Exclusionary investing starts with a full universe of assets, then seeks to remove stocks, funds, and the like that impact investors would not want in their portfolios. This has the advantage of including “ESG-neutral” businesses, but may result in the inclusion of assets that might not have proven a sustainable, ESG approach.
What Are the Expense Ratios and Management Fees for ESG Funds?
The costs associated with ESG funds do vary widely. In almost all cases, ESG funds are actively managed, resulting in higher fees than passive ETFs or mutual funds. Typically, the fees for an ESG fund will vary between 0.4% and 0.8%, although there are outliers on both sides.
You will need to have a conversation with your ESG investors about these fees and figure them into overall returns.
How Do I Demonstrate Investment Success to ESG Investors?
Some ESG investors want to be reassured that they are not sacrificing returns for the sake of a particular perspective. It’s important to show that their ESG funds are performing on par with broader, whole-market, or other specialized funds.
One of the easiest ways to do this is to use our “Investment Performance as a Service (IPAAS)” platform to test and audit all of your wealth management data to ensure you’re capturing the right information points to show success—ESG or not.
First Rate also provides wealth management “Reporting as a Service (RaaS)” that can translate complex ESG fund data into easily understandable reports. This allows you to easily compare ESG performance, diversification, allocation, and approaches against other funds in the client’s portfolio or as a whole.
ESG investing is rapidly becoming table stakes, and more of your clients will be exploring their options with you. Access to strong, reliable ESG data will keep you informed and able to recommend funds that align with an impact investor’s needs. It’s time to have the ESG conversation, and help your clients build their wealth while helping the world be a better place.