When I became an investment advisor more than 20 years ago, focusing on responsible investment (RI) was the only career path that made sense to me.
That’s because I wanted to help my clients reach their financial goals but I didn’t believe that investing in companies that treated their employees badly, destroyed the environment or disrespected the communities in which they operated made sense as these organizations would not be profitable in the long run.
In those days, RI advisors researched the available ethical or socially responsible mutual funds and matched the screens that the funds used to their clients’ personal values. In most cases, the funds screened out companies that derived revenue from alcohol, tobacco, military weapons or gambling. These were widely referred to as the “sin” stocks.
Critics of RI suggested that investors were risking their hard-earned retirement dollars to take an ethical stand. Detractors often suggested that investors use the profits they could generate from investing in these “sin” stocks to make charitable contributions and “do good” that way.
That line of thinking led to the performance myth that bad companies make piles of money and good companies don’t. Even as our world has become more complex — and we regularly witness the loss of reputation and profits when poor corporate citizens mismanage their businesses — many of us still believe that socially and environmentally responsible companies will be less profitable than their counterparts.
Mounting evidence that investing responsibly does not have a negative impact on performance is finally dispelling that myth. There is widespread recognition that prudent investors have to be concerned about environmental, social and governance (ESG) issues such as climate change, water scarcity, supply chain management, diversity and excessive CEO compensation.
ESG criteria are being used to help identify risks that are not adequately addressed by traditional investment analysis. In doing so they are better able to accurately predict financial performance.
This does not diminish the values-based approach, but merely identifies the risks and rewards associated with ESG factors. It provides the information needed for your clients to capture the aspects of corporate leadership that will ultimately lead to superior risk-adjusted returns and positive societal impact.
As a result, RI has been proliferating. A handful of screened investments in the 1980s has grown to more than $1 trillion in assets under management (AUM) in Canada that utilize RI strategies. Much of that AUM represent institutional investors, but growth in the retail RI market has been outpacing the traditional market for several years as well.
The link between strong financial performance and RI is increasingly making it easier for today’s RI advisors to make the business case for their services. But they can also benefit from doing business in a niche that is largely being ignored by the mainstream investment advisory community.
A 2014 NEI Investments’ study found that 92% of Canadians say that it’s important to choose investments that are aligned with their values. By contrast, only 14% of advisors raised the topic of RI with their clients. That creates a huge market opportunity for advisors who are knowledgeable and experienced in RI.
Stephen Whipp, an advisor with Wolverton Securities Ltd. in Victoria, says that “the shift to RI in my business has meant that I now find myself managing significant growth instead of wondering where the next piece of business is coming from.”
Interest in RI is growing. So, you need to take the time to learn about your clients’ needs and be ready to offer them advice that incorporates their social, environmental and financial goals. Advisors who do this will be well positioned to capture a share of this growing market and the spin-off referrals that make an advisory business thrive.