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Here's How 3 Firms Integrate ESG Investing

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Those who think that sustainable investing isn’t important should remember this number: $12 trillion — that’s what the Forum for Sustainable and Responsible Investment estimates the total size of the market for those investments was globally at the end of 2018. That was up 38% since 2016.

Although an Aite Group paper, ESG: Finding its Way into the Hearts and Minds of Financial Advisors, states this number might be inflated due to including all investments by a firm, not just environmental, social and governance investments, the key is “practitioners across the board have committed to integrating sustainability deeper into their practice.” Further, as better ESG metrics and standardization of data happen, it will “drive tighter consolidation of ESG factors into investment selection.”

That said, Cerulli reported recently that some asset managers still remain reluctant to use ESG investing due to these challenges: client unfamiliarity with ESG factors (26%), the perception that considering ESG issues has a negative impact on performance (25%), and difficulty defining the boundaries of ESG (25%).

In addition, Cerulli states, “Asset managers believe that ESG factors have financial relevance, with 89% citing that they have an ESG integration approach. However, firms vary in their approach to ESG integration and how comprehensively they emphasize their ESG analysis. Processes often vary across asset class, investment strategy, and investment teams.”

The question is, how do wealth managers work to research, educate and implement ESG investing? The Aite report outlined 11 case studies of advisory and asset management firms and how they integrate ESG into client portfolios. Here are a few examples and their process:

  • Calvert Research and Management

Calvert has been working with ESG investments since 1982. It has $19 billion in AUM as of Sept. 30. It is affiliated with Eaton Vance, which aids in educating clients.

In doing its research, Calvert “actively engages” with companies as well as investor coalitions and industry groups to “drive great accountability and action,” the study stated. By helping companies understand the potential financial benefits of responsible practices, Calvert can effect meaningful change.”

It also follows four pillars of responsible investing: performance, research, engagement and impact, noting it has a top-down monitoring system and a bottom-up research approach.

  • First Affirmative Financial Network

This advisor network oversees $1 billion in AUM and AUA, and two years ago was acquired by BD Folio Investments. FAFN focuses on SRI, and works with more than 400 advisors through direct relationships, an asset management platform that has SRI products, and a special curation of tools and resources that are discounted for advisors.

Its platform also helps filter out companies that don’t meet its ESG standards, the paper states. It also provides SRI screens that allows investors to identify ESG issues most important to them, allows them to overweight or eliminate individual companies, as well as provides the firm’s proprietary proxy voting guidelines and corporate advocacy initiatives.

  • Gitterman Wealth Management

An independent RIA, which has more than $500 million AUM, focuses on ESG and will act as a co-chief investment officer for other advisory firms. Gitterman also provides model portfolios for advisors that deliver ESG and fossil fuel-free investments.

Also, advisors receive marketing and educational resources to be able to place themselves in the SRI marketplace, according to the paper.

Advisors also have access to FACTS, a separately managed account strategy. It is available as an actively managed portfolio of about 25 companies that are best poised for “price appreciation and total return,” all while following an ESG emphasis, especially focused on governance.

In reviewing the 11 case studies, that ranged from Morgan Stanley to 501(c)(3) Social Finance, Aite concluded that:

1) Managers of money need to be “cognizant of the challenges the world faces, determine how companies are situated to respond to those challenges, and deploy capital responsibly and transparently to drive positive change,” the paper stated. Aite added that investors are more likely to adopt ESG when they see how that investing makes a difference.

2) Client-facing wealth managers are critical in providing investment ideas that are relevant to the customer, such as conserving the world’s water supply. This is no small task as they need to know the topic, which is why using their RIA or BD for information and guidance can help.

3) Thought leaders also must help fill the knowledge gap.

4) Ratings agencies are important and “play a pivotal role” providing advisors, wealth managers and investors a standardized way to measure performance and deploy capital.

5) Language also is important, and many ESG practitioners use ESG, sustainable and values-based investing interchangeably. Standardized terminology must be adopted throughout the business, the Aite paper states.

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