This publication talks to a prominent ESG/impact-focused wealth management firm about the challenges and opportunities in its approach to managing portfolios.
How should a manager go about framing client expectations about the monetary returns that ESG investing makes possible? Have we got beyond the idea that there’s any sort of trade-off between ESG and making lots of money?
We’re not past it, and we actually think it’s a good debate. We adhere to our belief that ESG/impact investing can be implemented without sacrificing risk-adjusted returns (we’ve proven this). Case closed? Not exactly – because we also acknowledge that some clients actually do want to sacrifice investment returns in exchange for outsised impact. How is this done? Instead of maximising for a particular social, environmental, or financial return, we see value in optimising for all three, and this may mean intentionally taking a “trade-off” – but a calculated one.
What is your firm doing to train and educate staff about ESG to incorporate these ideas into how they talk to clients, analyse investments and manage portfolios? Are there talent shortages and skill gaps and how are you trying to deal with these?
We are integrating ESG and impact investing principles across the firm, at all levels. Contrast this with many banks, brokerage houses, and investment advisory firms who employ a dedicated team of “ESG specialists” who work in isolation from the rest of the core business. To integrate, and continue to stay at the forefront of this rapidly changing field, we host national retreats, regional trainings, attend conferences, meet regularly with investment managers, engage directly with our long-standing impact clients, etc.
We’ve also created an Impact Advisory Council made up of national experts in impact investing, like Jed Emerson and Richard Woo, to ensure we achieve that “scale with integrity” we discussed earlier. Another example is that the president of our firm, Craig Smith, serves as chair to our Diversity, Equity, and Inclusion Committee to ensure that our investment priorities mirror our internal operations.
When you start to talk to clients, who typically raises the ESG subject first? Have you noticed any shift over recent years?
A decade ago, clients were looking to dip a toe in this water. Today, we’re leading our clients and able to design fully-integrated impact portfolios across asset classes. As the business has grown and the impact field has evolved, what’s really changed is the breadth of issues we’re able to promote within portfolios. We’ve designed thematic expertise around a broad array of issues including environmental sustainability, financial wellness, education, diversity, equity and inclusion, and many more. We’re also seeing a dramatic shift in terms of who’s having these conversations with us and why.
As we’re undergoing a massive wealth transfer in this country, we’re seeing Millennials, and particularly women, driving impact within their portfolios. As we’re designed for permanence, we see this as both strategic business for us and promise for the future of the environment and society.
Is it getting easier to benchmark performance of ESG investments? Does the work of groups such as Global Impact Investment Network and others help?`
Our belief is that the performance of impact investments should be benchmarked against traditional industry benchmarks and that it may be counterproductive to the advancement of ESG/impact investing if the industry seeks to develop new impact benchmarks. There’s already enough confusion out there. Said differently, if we’re moving towards a future where “impact investments” are simply “investments” in client portfolios, we’ll get to that point faster without changing a universally accepted performance target.
The efforts at the Global Impact Investing Network (GIIN), Sustainable Accounting Standards Board (SASB), B-Analytics, Impact Management Project (IMP), and others are creating enhanced impact measurement tools which will allow us as investment advisors to go from measuring outputs (ie, numbers/metrics) to actual outcomes (ie, real environmental and social change).
There are several sustainable development goals laid out by the UN. Can all of these be easily incorporated into an ESG portfolio? If not, how can they be used?
It’s been estimated that it will take trillions of dollars of new capital to address the problems (and solutions) laid out by the UN Sustainable Development Goals. In 2017, Tiedemann made a strategic decision to align our impact investing themes with the UN Sustainable Development Goals, track them, and analyse our ESG exposures to them. The UN SDG framework is elegant in its simplicity: 17 high-level goals, colourful and iconic, inspiring (and at the same time a bit daunting!) to sum up our most pressing global goals in a simple framework. We’ve also learned that aligning with the SDGs is not enough – actually driving capital towards them is paramount.
We can debate that some of the SDGs are more “investable” than others (SDG 5 “Gender Equality” versus SDG 16 “Peace, Justice and Strong Institutions”), we recognise that the SDG’s are the most directionally important indicator we see out there.
A lot of firms seem to be offering ESG funds and starting initiatives. Some of this may be sincerely motivated but clients might surmise that a certain amount might be about marketing and image building. What should firms do to break through such arguably healthy scepticism?
New investment talent can help drive innovation within the impact investing industry and competition is healthy. That said, we understand the scepticism and have met our fair share of new entrants who are “greenwashing” or “impact washing” as a marketing ploy. For those trying to break through the scepticism, showcase an experienced team, a thoughtful investment strategy, a “theory of change”, and a deep understanding of the systemic social and environmental challenges facing us today. And make it personal – because it is.
How should private banks, advisors suggest that clients integrate ESG with the rest of their financial “balance sheet”, such as their spending habits, management of operating companies, philanthropy, etc?
Effective advisors truly understand what their clients value, and this extends far beyond their financial goals. Impact investing is most effective when investors allocate the most appropriate type of capital (or asset class) to the problem they’re trying to solve. And it’s also important to acknowledge that impact investing isn’t the silver bullet for every social and environmental issue out there.
Take supporting the arts for example, an incredibly important part of the culture and fabric of place, yet an area which is probably better suited for philanthropy than investing. But something like affordable housing, a national crisis in many places, may have a place in an impact investor's portfolio – extending or providing leverage to traditional aid. If an advisor can help align their client’s financial picture towards their goals, not only will they likely achieve them quicker, they’ll create a more lasting and meaningful relationship with their client.