Investing with Hearts and Minds (in that order): Wealth Management, ESG and the Advisor

by AM admin on September 25, 2017

Thomas J. Holly, US Asset & Wealth Management Leader –

A Nobel Laureate once said, “The times, they are a-changin …,” and these words have never rung truer for wealth managers.

As firms continue to refine their operating models and prepare for the upcoming $30T intergenerational wealth transfer, they also need to consider how these changing times—and client preferences—impact the investment process and client conversations.

Millennials, in particular, are a large driver of these changes. They’re looking for a deeper meaning behind every decision and action, especially in a time when joining a political protest has replaced dinner as a first date.  The same tenet holds true for creating, growing and managing their wealth.  For these investors—who are gaining more and more prominence and influence in the investment process—the journey is by and large as important as the destination.

According to a survey conducted by U.S. Trust, 67% of Millennials see their investments decisions as “… a way to express … social, political, or environmental values.” For their grandparents, the Silent Generation and Baby Boomers, only about half as many felt the same way.  So, what works for one client may not work for another—but demands for transparency, impact, and societal outcomes have moved to center, and aren’t likely to go away any time soon.

The focus will always include returns—but the right type of returns.

Let me explain.

While investing with a conscience will likely dictate the investment industry’s future landscape, it’s not an entirely new concept.

The first Socially Responsible Investing (SRI) activities date back to the mid 1700’s when Quakers prohibited their members from participating in the slave trade. From that came a broader interpretation of SRI where investments in “sinful” businesses like alcohol, tobacco, and gambling were avoided.  This evolved to Environmental, Societal and Governance Investing (ESG), which targets companies whose operations provide positive impact on the environment and/or other societal issues.

What we’re seeing today, however, is a gradual evolution from select preferences to transparency demands and calls for outright divestitures:

  • 1980s: A university sells a financial institution’s notes because of a previous transaction with another nation
  • 1990: The Council of Institutional Investors ranks “white hat” and “black hat” companies based on governance practices
  • 1999: The Dow Jones Sustainability Indices (DJSI) is launched
  • 2004: The Government Pension Fund of Norway establishes a Council on Ethics with the ability to restrict certain investments
  • 2007: The U.S. Department of Labor releases guidance that allowed advisors to consider the social impact of their investments without compromising fiduciary responsibilities
  • 2010: Several large European investors add social screens to fixed income investments
  • 2014: The European Parliament adopts a measure requiring certain large companies to provide annual reports on their ESG impacts

I find the patterns interesting when you align them along the change in client engagement and outreach: clients now expect their advice to include comprehensive solutions, including ESG investments. The conversation has evolved to include not only the baseline “what” (returns), but it now requires the addition of the “how” (where the returns are coming from).

And, it’s a timely one to have. Cerulli found that almost 50% of respondents either currently use, or expect to use in the next 12 months ESG strategies, according to a survey of HNWIs. Additionally, according to the US SIF Foundation’s 2016 report on US Sustainable, Responsible and Impact Investing Funds, more than 1 out of every 5 dollars under professional management in the United States – almost $9 trillion – was invested according to SRI strategies.

What’s also so interesting is how the financial advisor has to be versed in this investment type while simultaneously educating clients around the nuances associated with ESG investments—namely, the longer hold period and its impact on the portfolio.

Another non-Nobel Laureate once said that “… we’ve come a long way, baby.” However, wealth managers still have work to do—while balancing the demands of a changing investor preferences from a new client base, against the backdrop of regulatory uncertainty.

What’s your take on ESG investments? And what do advisors need to do?

I’d love to hear your thoughts.

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