Whether you call it sustainable, socially responsible, impact or ESG investing, the assets under management in these categories are exploding. By early 2016, they had climbed to $8.72 trillion in the U.S., equivalent to a 20% share of total assets under professional management, and to $23 trillion globally, according to the latest available macro data.
Current levels are likely quite a bit higher given the launches of new impact and sustainable funds as well as new and expanded sustainable ESG ratings for mutual funds and ETFs and the growing number of publicly traded companies reporting ESG data, but official numbers are not yet available.
Despite this growth, many U.S. financial advisors haven’t embraced these strategies, for a number of reasons. Some are concerned about lagging performance, although evidence is growing not only that these strategies generally don’t impair performance but that they can actually boost it.
Others don’t feel familiar enough with these strategies to recommend them to clients, but what if your clients are demanding sustainable or impact investments? What resources can you access to become more familiar and more comfortable with these investments?
The listings that follow are for those advisors, but even advisors at major brokerages like Morgan Stanley or UBS — which holds one-third of its assets in sustainable investments — with access to multiple resources on their corporate platform may find them useful.
Using an ESG approach to investing is more than simply “finding a fund a client likes and checking off the impact or ESG box,” says Tim Freundlich, president of ImpactAssets, a boutique donor-advised fund, who works with about 300 wealth advisors across the country.
“It’s a lens that overlays all the stuff you’re doing … an approach that like value or growth includes a time horizon, risk profile, and fits the impact a client is passionate about … an investment theme … It’s not just finding a little magic bullet to placate your client.”
The following sources can provide a good introduction to ESG, sustainable, socially responsible and impact strategies.
The forum is an especially good first stop for advisors just starting out in impact investing but is equally useful for advisors more experienced in sustainable investing. The forum is dedicated to the advancement of sustainable, responsible and impact investing expertise and offers an online course, the Fundamentals of Sustainable and Impact Investment, for advisors and other financial professionals that explains how to talk about SRI with clients, incorporate SRI into investment portfolios and understand the latest trends and research.
Members of the nonprofit organization collectively have $3 trillion in as sustainable assets under management or advisement, says Meg Voorhes, director of research. Members include asset management firms, asset owners, community investing institutions, nonprofit organization and service providers, the category that includes financial advisors.
Membership provides advisors networking and education opportunities, access to US SIF Foundation research and publications, discounts to its annual meeting and, most importantly, inclusion in the US SIF’s online Financial Services Directory, which investors use to locate financial planners, advisors and brokers as well as other types of financial practitioners. Members can display the “US SIF Member” logo on their websites as a mark of commitment to sustainable and responsible investing.
The cost of membership varies and is based on the amount of annual revenues from SRI/ESG services, ranging from $595 for firms collecting less than $250,000 in such revenues to $27,860 for firms collecting $30 million or more from such activities, with gradations in between.
One of the key challenges facing advisors who want to invest client assets in sustainable or Impact assets concerns the data that defines these investments. There are many different analytics providing those measures, but the Sustainability Accounting Standards Board (SASB), based in the U.S., stands out. It’s independent, overseen by the nonprofit SASB Foundation and sets the standards by which many publicly traded companies disclose material ESG information in mandatory filings such as quarterly and annual reports.
The standards focus on sustainability topics that are likely to have material impacts on the financial condition or operating performance of companies, and its advisory board consists of about 20 institutional investors including the asset management divisions of UBS, Goldman Sachs and Wells Fargo as well as BlackRock, PIMCO, TIAA, State Street and the country’s two largest pension funds, CalPERS and CalSTRS.
Approximately 80% of S&P 500 companies release an annual sustainability report (though not necessarily based on SASB standards), and about one-quarter have instituted board-level sustainability committees, according to a Harvard Business School working paper published in May 2017. The SASB standards can help advisors figure out what disclosures in those reports are material for investors.
United Nations Principles for Responsible Investment (www.unpri.org)
The PRI, as it’s widely known, is a leading international proponent of responsible investment with more than 1,900 signatories representing asset owners, investment managers and service providers in 67 countries, including 360 in the U.S.
The signatories pledge to follow these six principles to advance the application of ESG strategies in the investment process:
- To incorporate ESG issues into investment analysis and decision-making processes
- To be active owners that incorporate ESG issues into ownership policies and practices
- To seek appropriate disclosure on ESG issues by the entities in which we invest
- To promote acceptance and implementation of the six Principles within the investment industry
- To work together to enhance their effectiveness in implementing the Principles
- To report on their activities and progress towards implementing the Principles
The PRI publishes several ESG guides that can be useful for advisors:
- A Practical Guide to ESG Integration for Equity Investing, focused on how to incorporate ESG factors in equity investment strategies, including fundamental, quantitative, smart beta and passive investments
- A Fixed Income Investor Guide, which incorporates ESG factors in fixed income
- An Investment Policy: Process and Practice Guide for Asset Owners about how to incorporate ESG factors into investment policy
The nonprofit network, dedicated to increasing the scale and effectiveness of impact investing around the world, focuses on the impact of those investments at least as much on their financial returns, and on how to measure their impact.
The investments, made in companies (often private), organizations and funds focus on infrastructure, education, community development, food and nutrition, health and the environment, and are concentrated outside the U.S., in the Middle East, Africa and South Asia.
Despite this approach, GIIN is not an organization just for nonprofits. Its upcoming Investor Council Annual Meeting breakfast reception in mid-March will include representatives from Credit Suisse, Athena Capital Advisors and Nuveen.
Its website includes multiple resources to help integrate impact considerations into your investment management. They include:
- The Impact Management Project to identify key fundamentals for understanding impact and more clearly articulate goals and expectations
- The Navigating Impact Project which can help align impact goals and expectations to credible, evidence-backed investment strategies — such as those targeting housing, clean energy, or smallholder agriculture — and uses metrics that indicate performance toward their goals
- The IRIS, a catalog of generally accepted performance metrics that the majority of leading impact investors use to measure and manage social, environmental, and financial performance and evaluate deals. The GIIN manages IRIS and offers it as a free public good.
The GIIN is also developing an Impact Toolkit that can be customized by users to match systems, methods, indicators, and data that are best suited to their specific needs.
The CFA Institute (www.cfainstitute.org)
This global standard-setting association for chartered financial analysts has myriad online courses, webcasts, podcasts, workshops and publications dedicated to the implementation of ESG analysis for investing.
Its upcoming late March annual meeting in Los Angeles will include a Practical Implementation of ESG for Private Clients, and the institute is partnering with PRI on ESG outreach for a major study, workshops and an expansion of its ESG survey of members, which will be published this year.
Its current program curriculum discusses ESG and socially responsibility investing issues across levels and includes ESG risk exposure analysis, corporate governance valuation implications, and positive and negative SRI screen impact on portfolio style characteristics. The CFA Institute says it will continue evaluate the volume and emphasis of ESG issues in the CFA Program curriculum.
Its website is filled with other publications and articles for those just starting out, including the group’s ESG Guide for Investment Professionals, published in 2015, which is a good overview for advisors just starting to learn about ESG.
“There is much more information now about ESG, and more companies are issuing sustainability reports,” says Voorhes of US SIF. “The challenge is getting companies to report in standardized ways and for users of the data to get the information that matters to them.”
In addition to SASB, MSCI, Sustainalytics, Bloomberg and ISS rate companies’ ESG performance and Morningstar, in partnership with Sustainalytics, provides sustainability ratings on stocks, mutual funds and ETFs.
There are multitudes of other resources for advisors interested in sustainability investing and ESG, among them GreenMoney, World Resources Institute, sustainableinvesting4all.com, Neighborly, Fossil Free Funds, The Sustainable Investor and Ceres.