Published May 2, 2018
Today’s advisors are repeatedly fielding questions regarding ESG (Environmental, Social, Governance) investing, even beyond millennial investors. The term “ESG investing” has a fluid definition among advisors and clients, ranging from socially responsible investing to simply screening and excluding investment opportunities for moral or ethical reasons. In our April Market Update call with Guy Adami, we called upon a panel of experts including Christian McCormick of Allianz Global Investors, Anthony Ames of Eaton Vance and Rob Stewart of Newton Investment Management to discuss this investing environment and help our advisors understand how to incorporate these practices into their firms.
ESG Investments go Beyond Aligning with Personal Values
Adami mentions that there are really five aspects to ESG investing: mission-related investing, impact investing, social responsibility, sustainability, and positive or negative screening. There is so much complexity surrounding ESG investing, but panelist Rob Stewart recommends stepping back and looking at the bigger picture. We’re talking about environmental, social, and government factors, and we believe that taking these into consideration makes us a better investor and also allows us as advisors to deliver better returns for our clients. All of the academic studies show that integrating ESG on some level is a smart investment strategy, contributing to even better returns.
There have been numerous events over the last few years prompting this conversation encompassing the departure from Big Tobacco in the late 90s to Enron’s corporate governance failure in the early 2000s and today with gun control in light of the recent Parkland, Florida shooting. We also have issues that people are deeply passionate about including climate control and fossil fuels. People are recognizing that investing blindly leaves them open to exposure. We are seeing a different kind of investor emerge; one who lives their life with certain values infused in every area and wants to economically express them as well. Some are motivated by risk, some by morals or ethics, and still others by profit.
Our expert panel believes that looking at ESG factors ultimately gives you a better overview of a company. Even in any standard equity portfolio, it will give advisors a better assessment. You can improve your risk/return profile while incorporating these factors.
Advice for Advisors on ESG
Start the conversation and get on the same page as your clients. In a survey of 1000 investors, only 4% could define ESG. We’re great at the jargon, but not so much the explanation. Separate the vocabulary and terminology; instead, broaden the approach and pose the benefits to your clients: avoid the headlines, improve returns, etc. Perhaps host client events specifically addressing ESG, and think of other creative ways to attract clients. Simply open the door for dialogue and allow people to discuss different views and address what options they have when it comes to their portfolios. One idea was to find a mission-based organization in your community and partner with them on an event. It gives the organization an opportunity to talk about their cause and allows you to gather a roomful of like-minded individuals for discussion.
ESG investing isn’t going anywhere. It affects every company and should be considered as a potential risk. For example, the Opioid Crisis isn’t just a moral issue; it’s a financial one that poses a significant threat to a number of companies. Anthony Ames says ESG investing is “continuing to evolve from a niche to something that is much more common. In Europe, if you’re not doing ESG as a manager, it’ll be difficult to get clients.” The advisors’ ability to talk, connect, and engage with a contemporary definition is crucial to his or her success.
From Excluding to Taking Positive Action
Companies have only recently begun producing corporate sustainability reports. It enables us as investors to do a much better job of evaluating these companies and their use of non-financial capital. Guy Adami posed a question about why clients should care about active voting. Active voting is tied to engagement. Historically, excluding particular investments was the go-to strategy for socially responsible investing. But is that really contributing to an improvement of the situation? Panelists agreed that advisors should now transition to a concept of engagement – actively participating and engaging with the management of these companies to facilitate change. While it seems counterintuitive, for example, “I hate fossil fuels so why would I want that in my portfolio?” by owning some of the company you are able to actively participate and have a direct impact through your votes to achieve the positive change you’re looking for. It may be a difficult sell, but facilitating actual change is a far cry from simply feeling better about not owning something.
How will you facilitate the ESG investing discussion with your clients? Join us for quarterly market calls with Guy Adami to gain more insight on other pressing issues facing advisors every day.