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Portfolio > Portfolio Construction

How Advisors Can Help Clients Be Socially Responsible Investors

By Michael S. Fischer

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The National Association of Personal Financial Advisors on Monday published several tips for consumers who want to become socially responsible investors, but worry about the financial tradeoff from such investments.

Sustainable, responsible and impact investing is growing by leaps and bounds. From 2014 to 2016, the sector grew by more than a third to nearly $9 trillion, according to the Forum for Sustainable and Responsible Investment Foundation (US SIF).

“With a wide range of investment options and ever-changing definitions of industry terms, this space can be confusing for consumers,” NAPFA’s chief executive Geoffrey Brown said in a statement.

“These tips from NAPFA advisors offer guidance for anyone interested in becoming a socially responsible investor.”

Advisors’ Role

Financial advisors can play a major role in allaying impact investors’ concerns and helping them make informed investment decisions. First, however, they have to figure out how they want to position their firms for clients who wish to engage in impact investing, according to Danielle Seurkamp, a Cincinnati-based certified financial planner.

“Someone who simply wants to swap out a fund or two to satisfy a specific client’s wishes is going to approach this in a very different way than someone who wants to make sustainable or socially responsible investing a core part of their business,” Seurkamp told ThinkAdvisor.

An advisor focused on a specific client can use a tool such as Morningstar’s sustainability score to evaluate a fund’s sensitivity to environmental, social and governance practices, she said.

She noted that Morningstar now rates many funds on a five-globe scale relative to funds in their peer group, using data from a company called Sustainalytics. Five-globe funds are in the top 10% of their peer group as determined by their ESG score.

“This can be a useful way to compare similar funds on their overall track record with issues such as emissions, pollution, diversity and human rights practices and transparency in governance,” Seurkamp said.

Advisors who want to make impact investing a core part of their business will have to educate themselves on the numerous approaches that exist, she said. They can find free resources from Morningstar, MSCI, the US SIF and others.

Once a firm understands the landscape, it can decide how to approach portfolio construction, Seurkamp said. “That starts the same way our conversations with clients do — by discussing goals. Do you want to develop a portfolio model that reduces environmental impact or one that focuses more on social issues such as abortion, tobacco or child labor?”

She said the resulting decision will inform which criteria to use in selecting investments for the portfolio, and will ultimately demonstrate the difference between the firm’s portfolio and others in the broader market.

“At my firm, we decided to focus primarily on greenhouse gas emissions,” she said. “Once we made that decision, it became easier to decide which investments served the goals of the portfolio and which did not. It also enabled us to frame the conversation with clients about exactly what they would get from our sustainable portfolios.”

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Michael S. Fischer

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