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The Green Advisor: The Wave Is Rising

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Environmentally-conscious investing is still a minuscule part of the overall financial services universe, but it’s a segment that edges closer and closer to the mainstream every year. Sustainability and other green issues have become a much bigger part of the socially responsible investment movement (SRI) in the last few years, particularly as a greater emphasis has been placed on the “E” in ESG (environmental, social, and governance) factors by investors.

A new white paper, “Responsible Investing: A Paradigm Shift,” by Robeco, the Rotterdam-based financial services company and Booz & Company, the London-based global consulting firm, predicts that by 2015, the responsible investing (RI) market, encompassing both SRI and SI (sustainable investing), will account for 15% to 20% of global assets under management ($26.5 trillion). (You can download a copy of the study here.)

To date the biggest players in this investing arena have been large institutions and pension funds, but the study expects more individual investors to be attracted by concerns about climate change, alternative energy, and clean water. The authors of the paper pointed to increased social awareness among investors, higher prices for energy and raw materials, changing legislation, technological innovation, and “the established track record for RI performance,” as among the driving factors behind the expected mainstreaming of this investment philosophy.

A Sustainable Hub

It seems that when investors are asked if they would like their investments to reflect their personal beliefs, the answer is usually yes, but when advisors are asked if they offer their clients that option, more often than not, the reply is, “if the client asks for it.” Beyond well-established fund families such as Calvert or Pax World, many advisors aren’t sure what else they can offer.

“As I looked at the marketplace and did a little research around SRI investing, I realized that there was really no central hub for advisors to access investment product, insight, or strategy,” says Bill Crager, president of Envestnet, the Chicago-based provider of wealth management solutions. At least there wasn’t until last year, when his firm launched its sustainability platform.

The idea of sustainable investing had long appealed to Crager and after long talks with several advisors he came to the conclusion that it might provide an excellent opportunity to enhance Envestnet’s offering to advisors and “at the end of the day, to do some good.”

He knew going in that the initial usage on the platform would not be as high as other Envestnet offerings. So far it’s attracted only a few hundred of the roughly 13,000 advisors who use the firm’s platforms, but the level of assets invested through the platform is about $400 million. “That’s the old chicken or the egg question,” he says with a slight laugh. “If you build it, will they come? I think because we’ve streamlined and created the accessibility, we’ve seen advisors [embrace the offering] who wouldn’t have thought about this. You go through the normal process of delivering a UMA solution to an investor. At the end of that process there’ll be a question. ‘Does your client want to manage this portfolio with any restrictions?’ It’s a click-click-click and you’re able to implement that portfolio. I think that accessibility broadens the number of advisors who will introduce the idea to their clients.”

Crager says he’s also spoken with a number of advisors who have been attracted to the platform because it gives them a point of difference when compared to other advisors in their markets.

Turnkey SRI

Advisors who have clients who subscribe to an SRI philosophy can use the platform to build customized portfolios based on whether the individual has a more environmental or social perspective. Crager says his firm worked with KLD Research and Analytics to develop some advanced screening tools that make the effort work.

At this point Crager says there are about 75 investment solutions–SMAs, mutual funds, and ETFs–available on the platform. “We’ve built a very complete universe of product that I would call integrated SRI, which means that they begin with a perspective. They want to manage an environmentally friendly fund, or they want to manage a socially conscious fund or a religiously conscious fund,” he notes.

The last piece of what Envestnet offers on the product side, according to Crager, are complete portfolios, such as a moderate-risk, environmentally friendly portfolio.

“Not only are we building the asset allocation, but we’re selecting the risk appropriate mutual funds or ETFs in that portfolio and we’re managing it on an ongoing basis, again with a tilt towards whatever your criteria are,” he explains.

“We let the manager do what they do and then we’ll screen out according to the criteria,” Crager continues. “We’ll manage not only at the inception of the portfolio but on an ongoing basis. So if a manager goes and buys a security that doesn’t fit, that doesn’t square with that person’s perspective, it’s screened out of the portfolio.”

Envestnet has also partnered with Veris Wealth Partners to create a series of turnkey “mutual fund wrap portfolios for different tiers of environmentally aware investors,” according to Crager. “We’re seeing those types of solutions become heavily used in your typical broker/dealer environment.”

Whether they are advisors or investment providers, those using the platform represent only the beginning of what Crager is certain will become a new avenue of opportunity for advisors. The real mainstreaming of this concept is going to take time. Crager says that people of his generation–mid-40s and younger–”have a different sensibility about the world they live in and are faced with some daunting challenges,” and they are more likely to think about investing to help meet those challenges. He also thinks that this type of investment has a greater appeal to those who have already accumulated a significant amount of wealth. “The very wealthy tend to be able to afford deeper interest,” he observes. “Large family offices, large wealth management firms are engaging with the type of client who is interested in these types of solutions. And it tends not to be the patriarch and matriarch of the family, it tends to be their kids or their kids’ kids who are interested and are asking their advisors questions about it.”

Proceed With Care

Crager is excited about the investment possibilities likely to be afforded by a green energy revolution, but he suggests that advisors and their clients proceed with caution. “It’s akin to the boom because you’ve got an enormous amount of innovation taking place to resolve massive challenges. And there’s going to be a certain amount of boom/bust to it because some technologies will become mainstream and some will not. All of that’s very exciting and it does create enormous investment opportunity, but it also presents investment risk, and that’s why I think you need these specialists who are focused on the space to do a good job.”

That’s one of the advantages that he says the professional money managers on the Envestnet platform can bring to the table. “It’s your institutional money managers who will perform very well and find the opportunities before the average investor can find them, and that comes down to the value of investment advice and depending on a financial advisor to work with firms that can seek those opportunities out,” notes Crager.

For advisors who are uncertain about adding an SRI option to what they offer their clients, Crager has one word–demographics. “Think about this next generation and how you’ll serve them,” he suggests. “Offering a broad set of solutions including SRI adds credibility to your investment practice. I think the simplest way to start is to ask your clients if they’re interested. They might not be, but just by offering that possibility it can stimulate some interesting discussions and lead perhaps to dollars that invest in a sustainable way.” Even if it doesn’t lead to that decision, Crager says that still, “it engages your client in a way that’s unique.”


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