Q&A: Seeing the Risks, a Firm Transitions to ESG

Editor’s note: This is one in a series of Q&As with financial professionals about how they’re incorporating environmental, social, and governance factors into their investing approaches and their views on ESG risk.

Advisor Sam Ogrizovich has been running his own firm in Orland Park, Illinois, since the late 1970s but only recently started incorporating ESG into his practice after observing that sustainability issues were becoming challenges for companies. Ogrizovich, CFP, is the founder and president of OFM Wealth, where he works with Cristine Marik, CFA, CFP, a senior wealth manager.

Why did you decide to integrate ESG into your practice? Ogrizovich: In 2016, I realized that issues such as climate change risk, consumer privacy, and questionable corporate governance were increasingly problematic, and our firm could potentially respond to these challenges. I thought we could respond by sharing our concerns and hopes with engaged clients and, subsequently, directing significant dollars to purposeful investing.

What was the biggest challenge you faced incorporating ESG into your practice? Ogrizovich: There were a few significant challenges. First, our advisory team had to understand the various ESG issues. Then, the team explored the depth and breadth of potential investment solutions. No small task. Research, material ESG screening, and product development have grown far beyond the information and products that were available three to four years ago.

As our research progressed, we challenged ourselves to confirm that the pursuit of sustainable investing was not only valid but also in our clients’ best interests. Our increased awareness of ESG issues and the connection between those issues and potentially profitable ESG products led us to conclude that our sustainable investing initiative was clearly in our clients’ interests.

Our next challenge was appropriate message development. The acronym ESG, terms like impact investing and sustainability were not part of traditional financial dialogue. Much thought was given to introducing sustainable investing during client meetings as well as modifications to our website and newsletters.

It has been an exciting three years-plus process. Our research grows deeper and our messaging is now crisp and clear.

What was the reaction from established clients as you introduced them to ESG? How did you address their concerns? Marik: Our process for introducing sustainable investing to our existing client base has been ongoing for the last two years. We have had multiple conversations in some cases. Over 70% have expressed an interest in integrating ESG screening into their portfolio.

Some clients were unfamiliar with ESG and sustainable investing and were unsure how to respond. We found it helpful to shares stories of how fund managers are engaging with corporations on ESG issues and to show Morningstar reports of fund holdings. This was instrumental in demonstrating that sustainable investing is not a “fringe” investment strategy.

By far, the most frequent concern raised was a presumption that ESG integration would hurt investment performance. We have successfully overcome the performance myth by giving clients real-life examples of how ESG-screened funds have not sacrificed on performance. All funds on our recommended list still need to meet our standard selection criteria including consistent risk-adjusted returns, reasonable fees, etc.

A few clients raised concerns that ESG was a government-directed initiative. We reassured them that sustainable investing is being driven by shareholders and capitalistic motivations.

Do advisors have a responsibility, fiduciary or otherwise, to consider ESG risks when investing for clients? Marik: As fiduciary advisors, I believe we do. If ESG considerations are material to a business and if a lack of proper management of these risks can negatively impact corporate profits and our returns as investors, why wouldn't you look at all relevant available information? From our perspective, we view ESG integration not only as a risk-management tool but also as a means to identify investment opportunities.

How will ESG help your clients in the long run? Ogrizovich: I believe our clients will benefit in a few ways. I'm hopeful that certain investment risks will be avoided while opportunities will emerge. Also, it's powerful to witness how sustainable investing connects clients' money to issues that they care about in a dynamic, capitalistic marketplace.

Marik: We believe that by helping to solidify a connection between the clients’ “purpose”--issues important to them--and their investments, ESG will help them stick with their plan for the long haul. Going forward, developing sustainable retirement income withdrawal strategies will be directly connected to identifying sources of sustainable investment returns and companies that are addressing critical ESG risks, including the economic impact of climate change.

This article originally appeared in the first-quarter 2020 issue of Morningstar magazine. Learn how financial professionals can subscribe for free.