I’ve long maintained that ethical investing would take off after the next recession — and we are soon nearing that point.
During the financial recession of 2008-2009, investors watched the value of their portfolios decline over 18 months. The priority for advisors was limiting losses and keeping clients from selling at the wrong time — it was not the time to suggest integrating more ethical investments into their portfolio.
As I said while speaking on a panel at Inside ETFs Canada in November, much has changed since then. There has been a proliferation of ESG product in the mutual fund and ETF space. Industry statistics now challenge the notion that investors must sacrifice performance to invest in these types of products. But even more important is the mounting concern that something has to be done to save the environment and to reckon with widespread social injustices.
The historic bull market that ended in March 2020 came to a halt because of a virus, not because of investor greed, rising interest rates or an economic bubble. Social inequalities have come to the forefront with this recession. This year alone has seen massive wildfires, hurricanes, and demonstrations for minority rights and women’s issues.
As a result, now is the time to talk about the opportunities that exist in environmental, social and governance (ESG) investing. Advisors who do not take advantage of this may lose access to the second generation of clients: your clients’ children, who will increasingly seek to have a greater sense of control over the future they will inherit through the investments they make.
And these children will likely have the funds to make a meaningful impact. MSCI investor data indicate there will be a $30 trillion wealth transfer from baby boomers to 90 million millennials — the eldest of which have turned 40 — over the next few decades. Furthermore, 67% of millennials believe that investments “are a way to express social, political and environmental value” (compared with 36% of baby boomers).
There is no greater compliment than a client asking you to help their children with their investments. Helping the children will also bolster your relationship with your clients and improve your understanding of their financial picture. I want to have conversations about money with the whole family and be there to help with the transfer of wealth over time.
Waiting for the younger generation to talk to us about ESG is a missed opportunity. Advisors need to be proactive and have the vocabulary and investment tools to drive the ESG conversation.
There is no need to be overly technical, but it is important to know the broad distinctions within the ethical investment world. ESG and socially responsible investing (SRI) have been used almost interchangeably to denote ethical investing. I have used both over the years, but as the ETF product offering grows, I prefer to work with investments that have ESG filters to build my portfolios, as opposed to SRI products that exclude certain companies or sectors.
In my practice, clients are not surprised when I bring up my interest in using ESG products. I have been preparing them for this conversation over time with my articles and client newsletters.
Sometimes, the response is an immediate “I’m interested in that.” Other times, older clients will defer to their younger children as potential clients. Sometimes, there is little to no response from the client and I take that as a sign that enough has been said. The real conversations will begin in a post-pandemic world, when meetings can be held in person, in a relaxed environment.
As a discretionary portfolio manager, I began integrating ESG into my portfolios a few years ago with an emerging market ETF that had ESG screens. I have now broadened my offering to include portfolios that are 100% ESG.
These portfolios are built with the same overall structure and asset allocation as my regular ETF-based portfolios, as explained in my past columns. Depending on the client’s risk profile, I maintain the same broad geographical weighting. I prefer to use ETFs with ESG filters that do not exclude companies or sectors, but instead focus on a best-in-class stock selection for the core portfolio positions. Satellite positions in the portfolio can be more thematic and have a different index construction methodology, such as impact investing or socially responsible investing.
Whatever methodology one uses to construct a portfolio, it’s important to have conviction in the approach. Clients who want to make a difference by investing ethically look to their advisor for the best possible advice. Our relationship of trust opens the door to these discussions and puts us in the driver’s seat when it comes to product selection.