Helping clients align ESG investments with their goals | Financial advisors


ESG is a term coined in a 2004 United Nations report that called for greater inclusion of these values-based approaches in investment decisions. The trend towards ESG investing began to accelerate rapidly in 2018. Last year, assets in ESG-focused funds increased by 53% compared to 2020, according to data published by Morningstar.

Over the past few years, ESG has become an increasingly popular buzzword for a variety of investment styles. For example, this may mean avoiding investments in industries such as fossil fuels or gun manufacturing. Other times it means encouraging investment in areas like solar and wind power.

But determining whether an investment fits the bill is sometimes easier said than done. Richard Gardner, CEO of Modulus, a fintech company in Scottsdale, Arizona, which develops white-label financial exchange platforms and technologies, cites a 2021 study published in The Economist which found that the top 20 ESG funds in the world held investments in fossil fuel producers.

“Many also had investments in oil producers, as well as companies in the coal mining, gambling, alcohol and tobacco industries,” he says. “One of the problems with ESG funds is that there is no standard rating system, so simply investing in a given ESG fund may not align with an investor’s values.”

Faced with this conundrum, advisors can guide clients towards a better understanding of ESG investing while helping them avoid these pitfalls. Here are some factors advisors should consider when helping clients achieve their ESG goals:

  • Know the terms of ESG investing.
  • How investors can learn about ESG.
  • Examine several ESG strategies.
  • Assess clients’ investment and ESG objectives.

Know the terms of ESG investing

Besides the difficulty of determining whether a fund actually supports its environmental values, investors are often not sure what the “governance” part of ESG means and what criteria they should apply when selecting investments.

Governance risk includes a company’s legal and ethical management and financial policies, as well as measures regarding its stance on hiring workers and attention to environmental and social initiatives that are part of ESG investing.

Factors to be taken into account under the label “social” can include a company’s positions on issues such as working conditions, gender equality and relations with the communities where it operates.

How investors can learn more about ESG

Understanding the factors of ESG investing is a gargantuan task. Investment management firms have research departments to help sift through data or pay high fees for in-depth third-party research. So how can an individual investor make good decisions when it comes to aligning their investments with their values? This question is made more complicated by the large number of ESG funds available today.

“Investors can’t really know if an ESG fund truly reflects their values,” says Marjella Lecourt-Alma, CEO of Datamaran, a London-based company whose software identifies and monitors material ESG risks. “Some assurance can come from a combination of the transparency of the methodology, the quality of the underlying data set, and the feasibility of executing their stated strategy.”

The average retirement investor likely has little training in evaluating a data set, Lecourt-Alma says, so focus on how funds track improvements rather than static conditions.

“It might be more useful to focus on understanding how the fund plans to ensure quality, improve quality over time, and then how much time, effort, budget or quality of people are deployed to achieve this,” she said.

In fact, measuring progress on various ESG metrics is a key part of many fund methodologies. For example, ESG funds may include fossil fuel producers or other types of companies that, at first glance, may seem contradictory to the objectives of an ESG investor.

“Investors are hearing mixed messages about what ESG strategies are and whether they reflect values ​​we hold dear,” says Keesa Schreane, Global Partner Director at the London Stock Exchange and author of “Gambling on Green: Uncovering the Balance Among Revenues, Reputations and ESG”, due out later this month.

Examine several ESG strategies

Schreane adds that there are different types of strategies available, such as impact investing, which focuses on investing for positive environmental or social outcomes. She also cites ESG integration, which incorporates sustainable insights into established stock picking methods. She says doing the due diligence to understand these strategies can help investors align portfolios with their values.

She suggests that investors also consider the sustainability report of a stock they are considering. “It provides insight into how the business is doing and likely provides some insight into how far it’s come in terms of several key sustainability issues,” she says.

For investors who find financial reports incomprehensible, Schreane has some advice: “If it’s a well-done report, it will be easier to read and more informative than other types of reports.”

Companies are also taking other steps to make their ESG progress transparent, says Krista Morgan, general partner of Stage Fund, a buyout private equity fund. For investors, it’s easier than they think to do basic, yet informative research.

“Genuinely sustainable brands and companies often obtain certifications from reputable third parties, like B Corporation or Fair Trade,” she says. “Take the time to research social media to see if there is action behind their words. Find influencers you trust and give more weight to the companies and brands they support in your investments .”

Morgan says there are other clues for investors as to whether an investment meets their ESG goals. “Fund managers who actively pursue an ESG strategy will often talk about it publicly to gain credibility,” she says. “All materials will clearly highlight their strategy and why they believe it will deliver superior returns over an ESG policy in the fine print.”

Assess clients’ investments and ESG objectives

Bill Page, senior portfolio manager at Essex Global Environmental Opportunities Strategy in Boston, says there are ESG funds to suit every investor’s needs. But he says it’s important to assess investment goals, like retirement, as well as ESG goals. “The two can and should go hand in hand,” he says.

For example, if there is a particular global issue an investor is concerned about, a thematic fund, such as a water-focused index, may do the trick. If an investor prefers to eliminate segments of the market that go against their beliefs, an exclusion fund may be right for them.

But Page cautions about the importance for investors to know what they own. “There is no perfect company, and no ‘ESG action’,” he says. “However, make sure you’re comfortable with the investment process you’re investing in and make sure the manager provides optimal feedback.”

There is a wealth of information available on investing and ESG, so do your research, Page says. “In fact, there is more relevant research on investment vehicles and firms than ever before,” he adds.

Equally important, clients should list the concerns they have as investors on certain issues, he says. They can then compose a list of the types of businesses they want to research and possibly invest in, their top priorities, and the research and conversations they hope to have with you, their advisor, as part of their business goals. ESG investing.


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