A 3rd Dimension to Client Portfolios: Impact

This analyst blog is part of our coverage of the 2018 Morningstar Investment Conference.

Financial advisors take it as a given that they'll calibrate their clients' portfolios for return and risk.

But Kristina Van Liew, managing director of Graystone Consulting, believes that financial advisors should take a third dimension into account when assembling client portfolios: the impact that the businesses in the portfolios have on the world around them.

"Thinking about impact affects asset allocation but really comes alive with respect to product and manager selection," Van Liew said. Her firm manages nearly $8 billion in client assets, nearly two thirds of which is managed in a sustainably, values-aligned way.

Helping advisors incorporate sustainability into their practices was the focus of the session on the closing day of the Morningstar Investment Conference in Chicago. Van Liew and Michael Jantzi from Sustainalytics, whose evaluations underpin the Morningstar Sustainability Rating, discussed how to help clients establish portfolios that align with their intentions and values.

Sustainable, Impact, Intentional … Or? At the top of the docket was what to call it. Jantzi noted that the terminology has evolved over the years, reflecting the changes in the landscape. The original term was ethical investing, and the focus was on excluding various types of businesses from portfolios. That gave way to social responsible investing and then environmental, social and governance. More recently, Jantzi noted that the term "impact investing" has garnered traction to reflect that investors are thinking about how their portfolios impact the world. The impact of businesses can be negative, neutral, or positive.

Van Liew said she prefers the term "intentional investing" to reflect that client portfolios can be crafted to align with the investor's intentions and goals.

"Every investor has a different need set," she said. "What do you want to be intentional about?" She noted that helping a client or family home in on its values, then creating a portfolio that's aligned with those values, is central to what she and her firm does.

She also said that it's worthwhile to ensure that a client's investment assets are invested as deliberately and with as much consideration for their impact on the community and world as any assets gifted to charity would be. For example, if a family has a passion for addressing homelessness, a portion of the portfolio could be in loans backing affordable housing.

Both Jantzi and Van Liew took pains to note that incorporating sustainability and impact into an investment process needn’t compromise performance.

"Intentional investing doesn't imply concessions," Van Liew said. "The idea is to position the portfolio for both a financial benefit and some type of additional benefit."

She noted that she and the investment team she works with came to embrace sustainable investing slowly.

"I reluctantly came into this space," she said.

'Fiduciary Duty Has Evolved' Both Van Liew and Jantzi believe it's still early days for sustainable investing; among individuals, younger investors are driving the charge.

"For millennials," Van Liew said, "their values affect where they work, eat, and shop. Of course they're going to think about their values when they're assembling their portfolios, too."

Both panelists observed that while individuals originally drove interest in sustainable investing in the U.S., interest has been spilling over to the not-for-profit space.

In Europe, Jantzi noted, institutional entities are leading the charge into sustainable investing.

"If this conference were in the Nordic countries, or the Benelux countries, or Australia, this room would be packed with pension managers," he said. That's because many such investors are defining their roles as fiduciaries to encompass sustainability and impact. "Fiduciary duty has evolved beyond just looking at numbers. Now advisors are starting to think about the world that their clients are going to retire into."

Learn more about Morningstar's approach to sustainable investing.