Investment advisors who don’t offer environmental, social and governance investments in their practice might miss out on today’s largest generational trend in money management.
Not only are experts seeing a surge of interest in ESG investment by millennials and women – two key demographics who either are currently controlling or about to control immense wealth as the transfer of assets occurs or they grow more enmeshed in investment – companies have incorporated ESG into their business practices due to investor demand. “Get with the program” was the warning by two experts to RIAs attending a Morningstar Investment Conference session on how to incorporate sustainable practices into an advisory business.
And the facts bear out the warning given by Paul Ellis of Paul Ellis Consulting and Jeffrey Gitterman, co-founding partner of Gitterman Wealth Management, both who manage or consult on sustainable practices. Gitterman says the data on ESG has become more material and is seen regularly in the daily news. “In 1985, 80% of a company’s stock performance was based on financial metrics. Today, 80% of a company’s stock performance is based on mostly brand identity and customer loyalty, and the only tools that allow you to screen for predictability around those issues are ESG,” he said.
In addition, 20% of all Fortune 500 companies are held by signatories of the Sustainable Accounting Standards Board, which Ellis said was basically the FASB for ESG data. And most of those companies have “at least two climate scientists on their payroll right now because many won’t entertain long-term projects without conferring with climatologists,” Gitterman said. Even insurance companies have started denying long-term bonds along coastal real estate projects, so ESG already is changing business behavior, he said.
Ellis, who began his sustainable practice while at Merrill Lynch in the 1980s, which he eventually sold, said ESG has “more acknowledgement today by large asset managers as well as advisor firms and is a significant part of how we do business.” Gitterman agreed, pointing out a recent shareholder letter sent by Larry Fink of Blackrock who wrote that if a board of directors isn’t integrating the climate change threat into its behavior, get a new board of directors.
Putting Into Practice