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I've worked with clients of all income and wealth levels who want to practice sustainable investing but are having difficulty making that happen.
To many, that may seem like an odd statement. But truly engaging in sustainable investing isn't about just matching a cause with a mutual fund.
In the first column of this series, I defined sustainable investing and described how it's an umbrella term for environmental, social, and governance investing, socially responsible investing, and impact investing. The opposite of sustainable is terminal. Nonsustainable investing is terminal investing, based on extraction from people and the planet, and it's how the dominant "traditional" investing model has run for centuries.
Clients who want to invest with their values may want to divest from industries such as private prisons and fossil fuels, or invest in renewable energy and local businesses. These clients also understand that most investment products, especially ones available to retail investors, are not intentionally designed for sustainability.
More often than not, there are hurdles to overcome in putting values into practice within portfolios.
If we simply start with exploring solutions, we lose an opportunity to understand and speak to the challenges that our clients may face when they've tried to tackle sustainable investing on their own or with an advisor who will not support their goals. Most importantly, when we focus on current solutions we can lose sight of what's possible. Starting with the barriers shines a light on what's in the way of a more sustainable future and, specifically, what's blocking capital from flowing to more worthy investments. The barriers I've seen and experienced fall into the categories of knowledge, access, and resources.
This article is a continuation of a series providing a framework for incorporating sustainable investing into your advisory practice. In the previous columns, we explored how defining your impact goals as an advisor creates a strong foundation for your work and how you can support your clients to clarify and document their sustainable investing goals alongside their financial goals. In this column, I'll summarize the barriers that I've found to practicing sustainable investing across different levels of income and wealth.
Knowledge Barriers to Sustainable Investing
When getting started with sustainable investing, investors may struggle to:
- Define values and financial needs.
- Translate values and financial needs into investment strategies.
- Evaluate investments to find the right match for those values and financial needs.
- Counter common myths of sustainable investing.
Advisors can help clients clarify and document their sustainable investing goals alongside their financial goals by developing an investment and impact policy statement. One value of this statement is that it clarifies the clients' priorities and the value trade-offs that a given client will or will not make. There are also common myths associated with sustainable investing, including the beliefs that ESG funds underperform and have higher expense ratios compared with non-ESG-screened funds. Jon Hale, Morningstar's head of sustainability research for the Americas, broke down these myths. Still, even with explicit values and knowledge, and the support of an educated and committed advisor, clients may not have access to appropriate investments that meet their needs and expectations.
Access Barriers to Sustainable Investing
Investors who face barriers to access, find that investments matching their values and financial needs:
- Are not available within the accounts they have access to, such as their employer-sponsored accounts (401(k)s, pension plans, and so on) or taxable brokerage accounts.
- If available, are hard to differentiate and get lost among "green" investment options.
- Do not exist.
In my first career as a public school teacher, I had a hard time investing contributions in my 403(b) retirement account and ended up choosing a "green" fund that, I later learned, owned multiple fossil fuel companies in its top 10 holdings. If investors want to divest from problematic businesses, such as industries driving climate change, while their money is still in their current workplace retirement account then the options are limited to the menu of investment options for the account, which are typically chosen by the account administrator.
Sustainable funds options have set annual records for the past five years in annual net flows into a rapidly growing menu of passive and active funds. However, that growth has not immediately translated into the widespread availability of these investment options in direct-contribution employer-sponsored retirement plans such as 401(k) accounts. Even if they are available, it can be difficult to evaluate the purported sustainability of investments to determine if they truly align with the values outlined by the investor's investment and impact policy statement.
Clients who are interested solely in public ("Wall Street") investments, will have an easier time finding options within their employer and taxable accounts compared with investors looking for private ("direct") investments in the solidarity economy. However, if appropriate investments are available, they may still not be accessible owing to reasons related to the investor's level of financial resources.
Resource Barriers to Sustainable Investing
Even when the investor has money to invest and has found investments that might meet both values and financial needs, those investments may:
- Require paperwork that can be intimidating and time consuming.
- Limit investment to accredited investors.
- Require minimum investment amounts beyond the investor's capacity.
- Not fit the investor's overall investment strategy, especially in terms of short-term liquidity needs.
The resources that I'm referring to in this category include time and investable assets. These resource barriers may apply to both public and private investments, but more specifically to private (that is, alternative, direct, regenerative) investments such as loans to Community Development Financial Institutions (CDFIs) providing equitable access to capital, community land trusts developing affordable housing, and worker-owned cooperatives building more equitable workplaces. Although the field has made great strides, the reality is that the process of moving capital toward alternative investments is not as streamlined as it is for investments available on public markets. There are real operational costs associated with moving capital and reaching investors. Alternative investment fund managers and communities leading community-controlled capital initiatives are working hard to meet the demand of investors who want to invest in a solidarity economy while staying true to their core missions of sustainability.
Advisors Can Make Sustainable Investing More Accessible
I often say that the choices people make are limited to the choices people have. The barriers our clients face when trying to do better with their money are also the ones that advisors face because working as closely as we do with clients means navigating the same financial waters. This is why building a niche--a focused group of clientele matched by age, income level, or profession--is popular advice for advisors because it's impossible to serve every client's needs. As an advisor, understanding the real challenges--and developing the knowledge, access, and resources--to building sustainable investment portfolios can be a professional journey that shifts your practice in profound ways.
Now that we've explored the most common sustainable investing challenges that investors and advisors face, in the next installment of this series we'll dig into how advisors can help overcome these barriers for clients across income and wealth levels
Phuong Luong, CFP, is an educator and financial planner focused on economic justice and closing racial wealth divides. She is a principal at Saltbox Financial, a virtual, fee-only Registered Investment Advisor. She is also the online facilitator for the Boston University Financial Planning Program. Luong is a subject matter expert in ESG and regenerative investing. Follow her on Twitter: @pt_luong
The views expressed in this article do not necessarily reflect the views of Morningstar.