Among the numerous investment risks advisers have to consider, ESG factors likely aren’t at the top of the list very often.
But when it comes to the future of their practices, advisers might need to reassess that. A considerable risk — at least when it comes to retaining clients — might be not offering sustainable investments.
Set aside arguments that considering ESG factors is a fiduciary duty or that ESG risks are financial risks.
Advisers who sing ESG’s praises or merely have it as an option say that ESG alone won’t lead to a flood of new business. But for clients who want their assets to line up with their values, it can be a make-or-break factor.
“It’s really one of the critical aspects of solving a lot of the problems that we face collectively, like climate change,” said adviser Patrick Dinan, whose firm, Impact Fiduciary, offers only sustainable investments. “A lot of people are waking up to that fact. They don’t want to invest in companies that are part of the problem.”
Some client relationships have resulted solely because of the firm’s focus on sustainable investments, Dinan said.
“There’s no question that that has helped the business,” he said. “At the same time, I’m sure there are a lot of people who look at that and say, ‘That’s not for me.’”
People in the latter camp appear to represent an ever-smaller slice of the investing public, particularly as alarming climate change reports and events such as Russia’s war on Ukraine have shaken some people to confront the makeup of their portfolios.
Fund companies have responded to that trend of demand that is snowballing as the earth is warming.
Last year, U.S. fund companies brought 70% more ESG products to market than they did in 2020, with the overall number of funds going up 36%, according to data from Morningstar Inc. Meanwhile, assets in U.S. climate-related mutual funds and ETFs increased by 45% over a year, hitting $31 billion at the end of 2021, up from $22 billion in 2020, a separate report from the ratings firm found in April.
A FlexShares survey last year of 285 people who work with financial advisers found that 72% of clients were at least somewhat interested in sustainable investing. However, just 13% of people said that their advisers had ever suggested sustainable or ESG funds to them.
More than half of the people who weren’t interested in ESG investing said they might change their minds if their advisers recommended it or explained how it could help their portfolios, that survey found.F
“This is being driven by clients at this point. Clients are pushing advisers, who are coming along very begrudgingly,” said Peter Krull, whose firm Earth Equity Advisors offers only sustainable, responsible and impact investments. “[Advisers] believe the myth that if you invest sustainably, you’re going to get a lower return.”
A separate survey by the Financial Industry Regulatory Authority Inc. and NORC at the University of Chicago found that among more than 1,200 people with taxable accounts, 9% hold ESG investments, with 36% being unsure. But 57% said they felt investing can be a way to make positive change in the world, and 77% said that funds marketed as “socially responsible” likely would align with their personal values.
Just 28% of people said that they were at all familiar with ESG, and only 21% were able to identify what the acronym stands for, with another quarter mistaking it for “earnings, stock, growth,” according to the groups.
About 60% of advisers used ESG funds last year, according to a 2021 report from Broadridge. But that use was limited, with just 7% of assets under management and 11% of clients invested in those products.
Most advisers said they had planned to increase their use of ESG funds, with their leading reasons being client demand (81%), a greater variety of products being available (52%) and performance of ESG funds improving (41%), according to Broadridge.
Data from InvestmentNews Research also show use among advisers trending upward. Currently, 64% of advisers indicate they use ESG products, up from 59% a year ago.
Something that should make financial professionals pay more attention to ESG is the role it could play in intergenerational wealth transfer, which could affect their businesses, several advisers said.
“The overwhelming majority of millennials believe [sustainability] is important,” Dinan said. Some of those future clients will be looking for advisers who are true believers, not just dabblers, he said. “The advisers who don’t embrace it — their businesses will suffer because of it.”
ESG can play a powerful role in people’s relationships with their money, Krull said.
“As we see this generational wealth transfer happen … there is going to be more and more interest in sustainable investing, because millennials have a huge interest in it,” he said. “We’re going to see a lot of folks who are inheriting money, taking it away from traditional advisers who are pooh-poohing what we do.”
Those prospective clients “don’t have the same political views as their parents and grandparents … and they don’t have the same investment outlook,” Krull said.
Helping those younger clients invest with a sense of purpose will make them much more engaged, he said.
“It’s almost like they feel like they don’t own it, because it’s been inherited — it’s been handed to them,” he said. “By aligning it with their values, they feel more ownership of it.”
Krull’s advisory clients have at least $250,000 in assets, but the firm is branching out with a robo service for people with at least $5,000 to invest.
“There is definitely interest in sustainable investing from the lower-minimum folks,” he said.
“Understanding ESG and the options that are out there can really help connect you with your clients.”
Mitchell Kraus, principal, Capital Intelligence Associates
Financial planner Alvin Carlos, managing partner at District Capital Management, said that currently about 5% to 10% of clients at the firm are interested in ESG. Offering it is “a nice to have,” although that could become more important for some people, Carlos said.
“There will be a group of people — millennials, Gen Zers — [who], when they become adults, will feel more strongly about doing sustainable investing,” Carlos said. “If financial planners don’t have it in their portfolios, they will lose those types of clients.”
Money, while it’s unquestionably important, isn’t the goal itself for many investors, said Mitchell Kraus, whose firm, Capital Intelligence Associates, focuses on legacy planning.
“Understanding ESG and the options that are out there can really help connect you with your clients … and lead to better discussions about planning, risk, family, philanthropy and all sorts of other ways you can help them,” Kraus said. “It’s a great door opener for other opportunities.”
Social issues are important to many clients. Others are opposed to investments in funds that include fossil fuels, private prisons or weapons manufacturers, he noted. One client wants to totally avoid investments in companies with business in genetically modified organisms, or GMO, he said.
Kraus said he doesn’t necessarily find joy simply by making money for clients, but he does find purpose in helping them build legacies.
“I love what I do, and I enjoy working with people for whom wealth isn’t the goal. The goal is to change the world around them,” he said.
There’s no shortage of funds on the market that seek to engage with public companies, including oil and gas firms, pushing those companies to set net-zero greenhouse gas emissions goals and find ways to reduce their carbon footprint.
Whether those products belong in a sustainable portfolio is debatable, though.
“When the core of your company is the cause of our existential problem right now — climate change — there isn’t much you can do from a shareholder perspective,” Krull said.
“I have a very skeptical view that anything is going to happen,” he said. “I’m not going to take a look at Chevron, Exxon or any of the U.S. [oil and gas companies] … They’re stuck in what they’re doing.”
It’s also a question of investing in companies that represent the future of the energy transition, Krull noted. “Why would I invest in yesterday’s technology when I can invest in tomorrow’s?”
When Dinan started his firm about five years ago, he “had gotten tired of investing people’s money into Exxon, Halliburton or some of these companies that didn’t align with their values or my values,” he said.
Since that time, he, like others who specialize in the space, has found that ESG ratings from third-party providers often don’t match up.
Advisers should be able to explain the differences, he said.
“You can look at different ESG ratings firms, and they have vastly different numbers,” Dinan said, and suggested that often those ratings should be taken with a grain of salt.
Having a focus on sustainable investing can be a big bonus for some clients. One customer who recently retired and decided to consolidate her investments among two advisers, down from three, moved much of her money to Impact Fiduciary, with her assets at the firm going from a couple of hundred thousand dollars to more than a million, Dinan said.
“She said it was specifically because of the focus on responsible investing and because the portfolio aligned with her values,” he said. “She felt better about investing a lot of her assets with my firm.”
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