Three Things Your Firm Needs to Know About ESG Investing

For many wealth managers, it’s normal to have clients that are worried about their investments; however, the reason for concern is not what it used to be. Investors aren’t just worried about how their investments are performing, they’re worried about what kind of impact they are making. In order to build lasting client relationships, it’s critical for wealth managers to evolve and understand this new set of expectations as well as how to measure them.

  1. What Investors Want to Know

Maybe it’s a new generation, or maybe it’s just a shift in standards. Nonetheless, investors want to know what’s happening beneath the numbers. They are interested in whether the companies that underly their investments hold stocks directly, through an index, or via actively managed funds. In addition, they want to know if the company is holding themselves to ethical, moral, and best-industry standards. From an investor’s point of view, it is very bothersome when the CEO of a core holding is called to testify before Congress on their business practices. Advisors must now be more sensitive and forthcoming when it comes to client questions and concerns about business practices that may involve moral, legal, and regulatory issues.

  1. The “New Normal”: How ESG is Changing the Investment Landscape

Environmental, Social, and Governance (ESG) criteria are more than just a passing investment fad. They go to the heart of whether a business is sustainable in the long run. In a recent survey of over 600 institutional investors that collectively manage more than $9 trillion in assets, Edelman Research found that virtually all investors expect that Boards will oversee at least one ESG topic, and more than half expect ESG initiatives to have a favorable impact on corporate growth. Since sustainability is by definition a long-term issue, younger investors are increasingly engaged in where their money goes. A recent FactSet study of high net worth investors notes that 90% of millennials want to direct their allocations to socially responsible investments. For many investors, ESG criteria are no longer an added bonus, they are requirements.

  1. The “Angel” in the Details: Measuring ESG

Although ESG  investments are in high demand, measurement isn’t simple or easy. MSCI, Sustainalytics, and Bloomberg all offer ESG metrics, but there is no definitive consensus on what should be measured or how. Should the Chairman always be different than the CEO? Are “independent” Board members who are peers of the CEO and who invite the CEO to sit on their Boards truly independent? ESG ratings have many layers. For example, a company that provides hospice services received poor ratings for environmental impact because their service providers use their own vehicles to travel to a client’s home. It’s crucial to get behind the aggregates and understand why investments have particular ratings.

It is the responsibility of Wealth Managers to look past the headlines in an effort to understand and explain what portfolio companies are doing. Successful Wealth Managers must match their clients’ expectations with investments that meet their requirements and aspirational goals not just their financial needs.

In this new world, it’s not just what you make (returns), what you keep (taxes), or what everyone else is doing (index returns). It’s how you make it. And how you look yourself in the mirror the next day.

Recommended Posts

Start typing and press Enter to search