What some financial advisors get wrong about ESG

Financial advisors who shun ESG products due to political backlash, opaque sustainability criteria or supposed lack of client interest are missing out, according to experts.

Advisors can't afford to ignore the ESG data now showing up in corporate financial disclosures or a movement of institutional and retail investors that now spans $35 trillion worldwide, including $17 trillion in the U.S. alone, said speakers at this week's Association of African American Financial Advisors (Quad-A) Vision conference in Atlanta. Allan Boomer, an advisor who is the managing partner of New York-based Momentum Advisors; Malik Sievers, head of ESG strategy with Charles Schwab's asset management arm; and Morgan du Plessix, a relationship manager with impact investing technology firm Ethic, each dispelled notions suggesting that environmental, social and governance criteria apply only to certain political bents or that clients don't care about sustainable investing.

Boomer acknowledged that "people's eyes glaze over" when advisors with his firm raise the subject with clients or prospects. In the end, though, the firm's focus on ESG has "allowed us to win a lot of business that we would've otherwise not won" by placing the industry jargon "in a broader context," he said.

"We never use the word 'ESG,'" Boomer added. "We never use the words 'socially responsible investing.' We speak to our clients about, what do they want their money to say about them? What should their portfolio say to the world?"

Tobias Salinger

The growing political noise surrounding ESG belies the range of products available to clients of any religion or ideology and the sheer amount of the sector's assets. Between 2018 and 2020, U.S. assets invested in products classified as sustainable soared by 42%, according to the Global Sustainable Investment Alliance, a coalition of financial firms and advisors. Many planners and asset managers may be deceiving themselves if they think that clients view ESG products as a distraction, research firm Cerulli Associates found in a report last year. And a purported "lack of investor demand" that soured advisors in a survey didn't hold true with clients.

"Based on our research, advisors generally underestimate the demand their clients have for ESG and should not interpret lack of proactive questions as a lack of client interest," says Cerulli Senior Analyst Matt Belnap said in a statement.

Indeed, Sievers said "ESG is here to stay" and advised the audience of advisors and other wealth management professionals that, due to interest among younger investors in particular, it's in "everyone's best interest to really understand, dig in here."

He and the other panelists responded to questions from advisors who said their clients would reject sustainable investing out of hand. One advisor said ESG is verboten among his clients because he's from Texas and much of the practice's base comes from the energy sector, while another said he works with law enforcement personnel who aren't drawn to social justice criteria used in many impact investing funds.

Sievers grouped clients into three categories: those who want to focus their portfolios around their own customized goals; "exploratory" customers who may be looking for a couple of mutual funds or ETFs based on specific themes; and clients who ask for an ESG screen in one area of a portfolio but not in another.

"It's a dial, not a switch," Sievers added. "This isn't an on-off thing. You have to basically, as everyone's saying, talk to clients, figure out how much they want incorporated. The reality is, if you take a look at initially what clients are holding, many of them have so-called good ESG characteristics and don't even know it."

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Ethic, which closed a Series C funding round this month of $50 million from investors including UBS' venture and innovation arm, offers other potential answers to clients' qualms. The firm uses direct indexing and separately-managed accounts that mimic the returns of the benchmark stock index of advisors' choice to enable them to create portfolios using any criteria. Ethic works with a couple of advisors' practices based in Texas already, du Plessix said. Advisors can tweak screens that exclude companies, discuss the value of risk mitigation or simply remind clients of the importance of their particular faiths to them, she said. 

"These companies are starting to realize that these issues are affecting them directly. It's affecting their bottom line. And if they don't start tightening up, it's going to start affecting their financial productivity and therefore their investors' portfolios as well," du Plessix said. "You can get creative with it. How ESG started and how a lot of investors still leverage ESG is through faith-based strategies, so focusing on strategies that are specific around Catholic values, for example, and making sure that they're not invested in companies that don't align with their religious values."

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From wrongfully incarcerated to ESG funds invested in prisons
Those conversations can lead in many different directions. Boomer related the story of a client who invested a lump sum wrongful conviction payment after spending 30 years in prison for a crime the customer didn't commit. The client was "appalled" to find out that a previous advisor had invested part of his portfolio in a bond issue financing correctional facilities without ever discussing the asset, Boomer said. 

The same client also told Boomer he had mixed feelings, though, considering he had once worked the highest paying job available to incarcerated people building car parts for an auto manufacturer. The client didn't want to threaten those opportunities for others, who might then be forced to accept a job "sweeping floors for a fraction" of the pay, Boomer said.

"It is complex, and this is not about our view fully," Boomer said. "It's more about the client's view. And so that client says, 'OK, I definitely don't want to own the prison bond, but I might be okay depending on what aspect in which they're profiting and that's complicated. But at least it's something that we're talking through. And he appreciated that we had that conversation, because we had never had that conversation before."