Sustainable Advice – The Business Opportunity of ESG Marginal Becomes Mainstream Sustainable investing is an investment approach that considers environmental, social and governance (ESG) factors in portfolio selection and management. Variants of ESG have been around for years on the fringes, but now the movement has entered the mainstream. Interest in this approach is growing more quickly than ever. Supported by demographic trends such as heightened interest among millennial and women, both of whom are gaining more investment decision-making authority, this growth is likely to continue. Regulators worldwide are encouraging, and in many cases mandating, ESG as an investing consideration. Institutional/Pension money along with retail guidance is driving a surge in ESG interest and creating a strategic business opportunity for forward looking advisors. Not your Daddy’s SRI There was a time when Socially Responsible Investing (SRI a more narrowly defined precursor to ESG) was considered noble but impractical. It began essentially focused on excluding “sin” stocks, those companies in the business of tobacco, alcohol and gambling and later added other social factors as well. You traded the good feeling of not supporting vice in exchange for often subpar investment returns. ESG on the other hand encompasses not only the negative/exclusionary screening of SRI but adds screens for positive/best-in-class business elements as well as important community impact and corporate governance factors. A more modern, sophisticated approach can often yield better investment performance, resulting in growing popularity. The Numbers are Real According to the Global Sustainable Investment Association (GSIA) the global sustainable investment market grew from $13.3T at the outset of 2012 to $21.4T at the start of 2014. Not only did ESG strategies see this absolute growth, but their share of institutionally managed assets grew as well, rising from 21.5% to 30.2%(1). Over that two-year period, the fastest growing region was the US, followed by Canada and the Eurozone. With $14.4T in assets, the largest sustainable investment strategy globally is negative screening/exclusions. Following closely is ESG integration at $12.9T, with corporate engagement/shareholder action the third largest at $7.0T. While negative screening is the largest strategy in Europe, in asset weighted terms ESG integration is now the largest strategy in the US, Australia and Asia. The largest strategy in Canada is corporate engagement and shareholder action. Performance Not Poor Anymore A 2015 study from the Institute for Sustainable Investing shows that sustainable investing met, and often exceeded, the performance of comparable traditional investment approaches (2). In terms of broad measures, the study noted that the annual returns of the MSCI KLD 400 Social Index, which is an index of 400 US listed companies with high ESG ratings and excludes companies whose products have negative social or environmental impacts, outperformed the S&P 500 by 45 basis points a year since its inception in 1990. At a more granular level the study examined the performance of 10,228 open-end mutual funds and 2,874 separately managed accounts over the last seven years and found that on both an absolute and a risk-adjusted basis, across asset classes and over time a sustainable approach had equal or better returns. Sustainable
equity mutual funds met or exceeded the median return of traditional equity funds for 64% of the time periods examined. Digital Overlays to Simplify your ESG Offering One unique factor about ESG investing is how personal and automated it can be. Objective financial factors including the client’s social values are now easily integrated into client automation, client management, and client communication tools. Before the arrival of digital tools, capturing and managing such client priorities were rudimentary, like being limited to an asset allocation model with only 3 buckets; stocks, bonds, and cash. That has all changed. Sophisticated tools like InvestCloud’s MQMA (Multi-Question, Multi-Answer) Sustainability Applet make it easy to capture and align client preferences with an array of ESG research factors, all controlled by the advisor or institution managing the assets. InvestCloud’s Sustainability Applet is built on InvestCloud’s fully integrated digital advice platform so tracking and reporting on those assets becomes more manageable as well. ESG was once a significant compliance and operational hurdle for advisors to incorporate into their advisory practice. InvestCloud’s Digital Advice Platform partners with advisors to quickly scale all types of client automation capabilities so ESG is now a scalable competitive advantage instead of cost burden. For more information about InvestCloud and how we help firms navigate the digital divide, visit us at www.investcloud.com or call us at 888.800.0188.
1:http://www.gsi-alliance.org/wpcontent/uploads/2015/02/GSIA_Review_download.pdf 2: http://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf