Investment advisors who don’t offer environmental, social and governance investments in their practice might miss out on today’s largest generational trend in money management. Not only are experts seeing a surge of interest in ESG investment by millennials and women – two key demographics who either are currently controlling or about to control immense wealth as the transfer of assets occurs or they grow more enmeshed in investment – companies have incorporated ESG into their business practices due to investor demand. “Get with the program” was the warning by two experts to RIAs attending a Morningstar Investment Conference session on how to incorporate sustainable practices into an advisory business.
And the facts bear out the warning given by Paul Ellis of Paul Ellis Consulting and Jeffrey Gitterman, co-founding partner of Gitterman Wealth Management, both who manage or consult on sustainable practices. Gitterman says the data on ESG has become more material and is seen regularly in the daily news. “In 1985, 80% of a company’s stock performance was based on financial metrics. Today, 80% of a company’s stock performance is based on mostly brand identity and customer loyalty, and the only tools that allow you to screen for predictability around those issues are ESG,” he said.
Ellis said to get a feel of his clients, he would take a simple survey listing all ESG metrics, which not only helped him direct client portfolios, but also enabled him to speak with asset managers on what his clients were interested in, for example 10% cared about carbon dioxide pollution, while another 15% were focused on water issues.
He said another trend he’s seeing is in adult children of baby boomer clients. “About 80% said if an advisor isn’t using ESG metrics in portfolio performance valuation, they would leave [the firm when they inherit their parents’ assets],” he said. Further, those who have or inherit legacy stock positions are using those to become more activist shareholders.