Market Insights

On November 13^th the Wall Street Journal published an article entitled “A Socially Responsible Strategy Can Be Tricky” that largely took to task Environmental, Social and Governance (ESG) investing.  Though the author rightly identifies the subjective, and at times confusing, nature of ESG criteria standards (something Dana has previously discussed), the majority of the article is a somewhat cynical view of ESG investing as a worthwhile economic endeavor.

The once red-hot market for unicorn investments has turned chilly. These start-up enterprises with a value of at least $1 billion have enjoyed relative easy access to private capital this cycle. Robust growth, easy credit and a fair amount of hype combined to elevate the early valuations of these companies. Peloton Interactive, Inc. (PTON), the maker of stationary bikes and treadmills, marketed itself as “selling happiness.”  Ridesharing company, Lyft, Inc. (LYFT) claimed it was “at the forefront of societal change.” Corporate real estate leasing company WeWork aimed to “elevate the world’s consciousness.”  

The October issue of Citywire RIA Magazine has hit the newsstands and they released an RIA Supplement titled, “ESG’s Time Has Come.”  Environmental, social and governance (ESG) investing seems to be a hot topic recently, but many advisors are not up to date with the ins and outs of ESG investing. 

As part of the supplement, Dana submitted an article answering many questions that advisors have about ESG Investing.  Questions include:

• What advice would you have for advisors who are looking to get into this space or deepen their ESG Investing toolkit?
• ESG Strategies have become popular. Why is this?
• What’s your approach to ESG Investing? How does it differ from competitors?
• What funds do you offer? Are they all ESG funds?
• How do you see the future of ESG playing out? Is it going to become more mainstream and just a regular part of how people invest?

“Among us, who is above must be in service to others.  This doesn’t mean we have to wash each
other’s feet every day, but we must help one another.”
-Pope Francis

What do we want to accomplish with our time here on Earth?  What impact do we want to have on society?  How do we want to help shape the future for the generations that follow?  Mankind has asked itself these philosophical questions for ages. Their emerging importance in the form of environment, social and governance (ESG) investing or sustainable, responsible and impact (SRI) investing is a relatively more recent phenomenon.

Faith-based institutions continue to be leaders in the evolution and growth of Environmental, Social and Governance (ESG) investing. During September’s Financing The Future summit in South Africa, 22 religious group organizations announced their plans to divest oil, gas and coal investments, solidifying Faith-based investors’ position as the single largest constituency exiting fossil fuels¹. While many ESG investing strategies utilize these exclusionary screening techniques to avoid investments in fossil fuels or sectors such as weapons, tobacco, alcohol and pornography, a group of Catholic faith-based investors are taking their ESG investment approach further by implementing and advocating a proactive approach to investment selection.

With over 75% of individual investors expressing an interest in sustainable investing, it is clear that investor demand for  Environmental, Social and Governance (ESG)  investments is real and growing¹. Yet, remarkably, only 36% of financial advisors are currently offering an ESG solution to their clients and less than 8% of co-sponsored retirement plans offer even a single ESG fund².  In that disconnect lies opportunity.  

The three main concerns advisors have with environmental, sustainable and governance investing are a lack of  transparency,  performance  concerns and client  demand.   

As demand for environmental, social and governance (ESG) and socially responsible investing (SRI) investment products grows, advisors are tasked with sorting out the good options from the bad. Unfortunately, there are many problematic products, many of which have been “greenwashed” or marketed in a way that makes the fund appear more ethical or responsible than it really is, which could result in tough conversations with clients.

Here are two approaches you should be careful with:

Here are five notable statistics that environmental, social, and governance (ESG) investors need to consider.

 

1. ESG is huge, and demand continues to grow. ESG investing is estimated today at over $20 trillion in AUM, or approximately a quarter of the professionally-managed assets across the globe.

For advisors, having the option to sit down and speak with a client about a topic that is important to them, but not strictly related to their investment performance, can be a very powerful tool. This is one of the benefits of having a strong Environmental, Social, and Governance (ESG) capability, especially since younger investors and women – two demographics quickly accumulating wealth – have shown such strong interest in the space. These robust conversations will also lead you to get to know your clients on a more personal level and potentially develop a level of trust that didn’t previously exist.

As RIAs put more and more thought into hiring managers who incorporate environmental, social and governance (ESG) concerns into their investment processes, the due diligence necessary to properly vet these managers has evolved.

Today there are many managers, even those not managing formal ESG strategies/funds, who claim to take ESG considerations into their investment processes.

Here are three questions you can ask as part of your due diligence: