There’s no doubt that interest in ESG, impact and sustainable investing is growing. But while many institutional investors have embraced those assets, managing almost $23 trillion of them globally, many financial advisors have not. “Advisors have been lagging,” said Jeff Gitterman, founder of Gitterman Wealth Management, which has offices in New York and northern New Jersey.
This year could be when advisors begin to embrace environmental, social and governance focused investing because an increasing number of clients are demanding it. “You can’t have all that client demand and so little advisor distribution,” explained Gitterman. Those advisors that aren’t offering ESG opportunities “will lose clients.”
At a minimum, they probably won’t attract as much next-generation millennial money or as many new female clients as they could since those populations are reportedly the biggest fans of ESG assets in the retail market.
Clients interested in ESG investing are “probably the fastest growing” segment among new clients at Capital Intelligence Associates, says Mitchell Kraus, a principal and co-founder of the Santa Monica, California-based multigenerational wealth management firm. “We find that female and younger clients tend to want ESG investments more than older males but there is no [ESG client] ‘type,’” he explained.
Kraus asks every client about ESG investing as part of his conversations about their goals and objectives. In the past, he would discuss ESG investing only after a client brought it up.
Many advisors are not embracing sustainable investments because of fears of the unknown and concerns about forfeiting returns, according to Erika Karp, founder of Cornerstone Capital Group, a New York-based firm that specializes in sustainable investing. “There needs to be a lot of education” and debunking of “the myth of underperforming,” she said. “The data is showing the opposite.”
Also needed, Karp explains, is more and better disclosure by companies about their ESG data that’s “linked to revenues, costs and risks … to issues relevant to their economic performance.”
“Over the long-term having a good ESG rating may become an important factor for individual securities,” said Martin Kremenstein, head of NuShares, Nuveen’s ETF division. Kremenstein sees a growing interest in ESG investments — NuShares has eight ESG ETFs on the market — and expects ESG will represent a significant share of the investment market longer term.
Tim Freundlich, who heads ImpactAssets, a $350 million boutique donor-advised fund that specializes in impact investments, expects that middle-market RIAs and registered reps with $5 billion to $15 billion in assets under management will soon follow the bigger players into impact investments next year. “They are nimbler and client-driven and they’re going to leap ahead of the big bank RIA wealth management platforms.”
He expects such advisors will invest not only in publicly traded stocks scoring high on ESG measures but also in private equity and private debt focused on making an impact, which could also be included in donor-advised funds. Such funds “represent a huge opportunity for integrating impact and sustainable investing,” Freundlich says.
Both Freundlich and Gitterman believe climate change and gender equality will be among the key impact areas favored by investors and advisors involved in sustainable investing in 2018. “Given what’s happened in the last three months and the groundwork already done, 2018 could be the breakout year for awareness and integration of gender-lens investing,” said Freundlich.
There are only 12 years to go to 2030, the target year for achieving the United Nation’s sustainable development goals (SDG) for a habitable planet. Gitterman expects there will be more SDG-themed funds coming to market in 2018 as well as refinement of the sustainability measures. Among the 17 SDG themes are gender equality, elimination of poverty, clean water and sanitation, climate action and quality education.
Index Managers & Stewardship
As assets continue to pour into passive strategies and responsible investing becomes more important, index managers’ stewardship activities can be expected to receive greater scrutiny. A recent study by Morningstar seeks to understand the stewardship activities of these providers of index-tracking investments, including traditional index funds, exchange-traded funds and segregated mandates.