The Fruits of ESG

In late 2015, Jeff Secord, an independent financial advisor in Bloomington, Ill., about 150 miles southwest of Chicago, was looking to win business from a local cancer center searching for an advisor for a new endowment. The center is owned by two healthcare companies that have environmental, social, and governance, or ESG, language in their investment policy statements. Secord, who had been in the business for 40 years, had never given much thought to adding sustainable investing strategies to his practice because he thought his local client base wouldn’t be interested. For this proposal, however, he built his first ESG portfolio. Two other firms competing for the business didn’t submit any ESG recommendations. Secord won the business. “I realized, by gosh, I can do this, and nobody else in my community is doing this,” Secord says.

The cancer center was just the start for Secord. He’s begun including gender-investing strategies in his lineup, including the SPDR SSGA Gender Diversity ETF SHE, which he says has helped him win more women as clients. His daughter, who works with him at the firm, launched what they call their Women’s Financial Empowerment Initiative in 2016.

While Secord had thought that people in his politically conservative area would have limited interest in ESG investing, he figures 60% of the clients and prospects he mentions ESG to are interested once they understand it likely won’t affect their returns. “There’s more tendency to say yes than no,” Secord says.

Movement Toward ESG Sustainable funds are those that use environmental, social, and corporate governance criteria to evaluate investments and assess their societal impact. These strategies may pursue a sustainability-related theme or explicitly aim to create measurable impact. While it would be a stretch to say that sustainable investing has entered the mainstream, for more financial advisors, it’s becoming less of a niche offering.

Just a few years ago, these advisors say, they would only discuss ESG investing with clients and prospects after they were asked about it. Today, these advisors incorporate ESG strategies into their practice just as they would any other kind of investment strategy, and they’re asking most, or even all, clients about their interest in ESG investing.

This shift, which advisors say has built momentum over the past three years, has coincided with a change in the ESG investment landscape. A decade ago, sustainable investing revolved around exclusionary strategies that avoided certain kinds of companies, so-called “sin stocks,” such as tobacco, alcohol, and gambling. ESG investing takes a more inclusive approach that looks for companies in every sector that have environmental, social, or corporate governance benefits. That shift, advisors say, has more resonance with a broader group of clients.

At the same time, advisors say the political climate in the United States since 2016 has led to a larger group of investors saying they want at least some of their portfolio to be aligned with their personal beliefs and to have the potential to create some positive societal good while attaining their financial goals.

Along the way, these advisors say, it’s helped open the doors to new avenues of business. They use sustainable investing to differentiate themselves from the competition and build more durable bonds with their clients.

“We began to realize several years ago that there was this movement toward ESG investing,” says Kathryn Nusbaum, an advisor specializing in institutional consulting at R.W. Baird in Charlotte, N.C.

Bringing ESG to Clients During an initial discovery meeting with prospective clients, Nusbaum doesn't raise ESG investing, but she will listen for cues about their interest as they describe their background, profession, and organizations they are involved in. "It relates back to the questions of 'What do you want your money to do? What do you want your wealth to accomplish?'"

When it seems that a client may be interested in sustainable investing, Nusbaum brings it into the discussion of portfolio construction. “I’ll introduce the ESG concept and just ask, ‘Is that something that is of interest to you?’”

These days, she says, many prospective clients will say, “I’ve heard of it, but I really don’t know what it is.”

Her explanation centers around how the strategies aim to invest in companies that are making a conscious effort to be more socially responsible.

“It’s just using that terminology and seeing if it resonates. If so, we go down the path. In some cases, it doesn’t resonate,” she says.

But, she says, “I feel committed to making sure my clients understand all of their options, and I think it’s important I mention it to just about all of them.”

Increasingly, institutional clients are interested in not just hearing about ESG investing options but also asking governance questions about the investment advisory firms, as well.

“It really comes back to understanding the client,” Nusbaum says. “But boy, if this is important to them, you better be versed in it and well-equipped to provide solutions. You are certainly cut off at the knees in the institutional space if you know nothing about it.”

She says that by subsequently folding ESG investing into the conversation, it adds another layer to the idea of improving clients’ lives. “We’re improving [their lives] by how we are managing their money and helping [them] move forward in a positive direction. Are they feeling their life is improving because they are making a broader impact on the world?”

ESG Client Questionnaire At Seattle-based firm Kutscher Benner Barsness & Stevens, Cameron Barsness says that in the past two years the portion of clients with some element of ESG investing in their portfolio has risen to around 40% from 10% to 15%.

Fueling that increase has been the firm’s shift toward asking all prospects and clients—new and old—about their interest in ESG investing. Each client is asked to fill out a short questionnaire on ESG investing. Barsness says that when the clients are a couple, the questionnaire is especially valuable because often one partner is more vocal than the other and will lead the conversation. By giving both partners the questionnaire, there’s a better chance to hear the quiet voice who may turn out to be interested in ESG investing.

The firm’s questionnaire is simple but designed to assess the client’s interest across the spectrum of ESG options. The first section is a list of 10 areas that could be represented in a portfolio, such as energy-efficient technology, environmental protection, faith-based investments, and gender diversity. Clients then check off whether they are “very interested,” “interested,” or if it’s “not a priority.” (There’s also space for clients to write in their own interests.) The next section gauges interest in avoiding portfolio exposure to areas such as fossil fuels or weapons. The final section measures interest in investments that have an impact but may have lower returns, such as social investments designed to reduce poverty and environmental investments such as fighting deforestation.

Barsness says raising ESG investing to all prospective clients has helped with building overall business. “If we don’t bring it up, half to maybe even 80% or 90% of clients are never going to bring it up, and we’re going to miss the chance to differentiate ourselves,” she says.

Millennial Interest A number of advisors say the level of interest in ESG investing bears a strong relation to the demographics of the audience.

At Di Ianni & Associates, a Merrill Lynch office in Aspen, Colo., Donna Di Ianni attributes her own awareness of the possibilities for ESG to having her 26-year-old son, Max Rispoli, join the firm. Surveys have found millennials to be significantly interested in ESG investing. “They are our next generation of investors, and with my son being a millennial, it helped me see the need to take a hard look at what’s out there, why it’s good for business.”

Recently, the Di Ianni group hosted a daylong ESG event broken out into three sessions for three separate groups of clients and prospects. One session was for women only, another broadly for high-net-worth investors, and the third was for young professionals. For the younger investors’ session, Rispoli tapped into a local networking group for young professionals to create the invitation list. One of the goals of that session was simply to let young professionals know that the Di Ianni group is conscious of the growing importance of ESG investing and the options they can provide.

Di Ianni says the interest in ESG strategies doesn’t have to come directly from the younger generation. In discussions with older clients, “in many cases we’re bringing their kids into the conversation and making it multigenerational,” she says. For example, for high-net-worth clients who are already using private impact investing in their family foundations, Di Ianni can show them how they can allocate their securities for other family members into an ESG portfolio.

Jack Ellenberger, an advisor at Hefren-Tillotson in Pittsburgh, had been looking for ways to differentiate and find new areas of growth for his practice. Three years ago, he already had a burgeoning interest in ESG investing when, with two young children and another on the way, he wanted to spend less time commuting. So, he began spending a couple days a week at a closer-to-home coworking space. That office is in Pittsburgh’s East End, a neighborhood home to Carnegie Mellon, a substantial Google operation, and a growing number of tech startups.

Being in the coworking space, he says, has given him many more opportunities to interact with an audience more likely to be interested in ESG investing. “It’s been a good place to see how the initial conversation [about ESG investing] goes,” he says. “I’ve made it a point to talk about it to just about everyone.”

Even if it doesn’t resonate with a client or prospect, he sees the conversation as an opportunity to hone his message.

Ready-Made Client Base Some advisors have more narrowly focused client bases ripe for ESG investing. Most of the clients of Morgan Stanley's Blue Rider Group in Manhattan are in the art community—mainly collectors but also people involved in arts foundations, museums, and organizations. Lauren Sparrow, one of the founders of the group, says that roughly 75% of its clients have some interest in ESG investing, and most portfolios have at least one ESG manager or impact-oriented investment.

“It’s definitely become more prevalent in the last three years,” Sparrow says. “People want to do something with their views, putting their money to work in a way that aligns with core values and not voting with their dollars for topics that they don’t believe in.”

Blue Rider finds an easy connection between promoting ESG investing and its audience. It recently hosted a group of clients to attend a documentary that touched on labor rights, and at the dinner afterward, the group held a discussion on impact investing as related to the themes in the film.

No Need to Sacrifice Returns Explaining ESG itself remains a big part of the effort, advisors say, especially given the combination of its relative newness and rapidly evolving options and terminology.

“Our approach is to really share some company-specific examples,” says Kathryn Hersey, a senior vice president in the wealth management group at Cambridge Trust in Boston. A recent example is the acquisition by Bayer BAYRY of Monsanto, which resulted in Bayer being exposed to lawsuits because of Monsanto’s Roundup weedkiller. Through an example such as this, she says, the firm can point to how ESG research can uncover issues that may not be a focus in traditional investment methods

Advisors say the most common question remains: Will ESG investing hurt my returns? With a growing body of research showing that ESG investing not only doesn’t hurt returns but can actually improve the risk profile of a portfolio, that discussion is easier to have.

Di Ianni says that after their recent seminars, the feedback from attendees tended to be, “Wow, if we can both do some good and do well financially, then why wouldn’t we look at that?”

This article originally appeared in the October/November 2018 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.