October was an exciting month for ESG news in the wealth management industry. The Biden administration released a proposed rule to bring ESG back to retirement plans; Federated Hermes and Capital Group surveys showed record levels of ESG interest; BlackRock and Robinhood made proxy voting waves; Facebook allegations highlighted concerns over greenwashing; and foundations made big sustainability commitments. Let’s break it down:
- The Biden Administration Wants to Bring ESG Back to Americans’ Retirement Plans
The Department of Labor announced a proposed rule that would permit retirement plan fiduciaries to consider material ESG factors like climate change when making investment and proxy voting decisions. This plan takes a 180-degree turn from the previous administration’s ruling (that received 95% opposition from Wall Street), which blocked employers from offering ESG funds as the default investment option.
What does this mean for advisors?
There is massive unmet demand for ESG retirement plans. While a Schroders study found that 90% of plan participants who knew about their plan’s ESG options invested in them, the Plan Sponsor Council of America’s recent survey found that only 3% of plans offer a socially responsible fund option. By removing the special rules that prohibited using ESG funds as the default investment option, this proposal is likely to dramatically increase the number of ERISA plans that offer ESG funds and the number of target-date ESG options available to serve 401(k) investors.
- Capital Group and Federated Hermes Release ESG Survey Results
It’s now impossible for wealth managers to avoid ESG, with 95% of financial advisors reporting that their clients have asked them about ESG or responsible investing. However, only one-third of those surveyed are currently implementing ESG into their investment processes. The biggest concerns center around data quality, with advisors feeling more comfortable with active investment approaches that employ proprietary research alongside ESG data.
What does this mean for advisors?
Throughout the history of responsible investing, financial underperformance has been the primary investor concern holding back adoption. But now, the biggest reported challenge is the difficulty researching and monitoring the real ESG performance of portfolios. At the same time, almost half of investors are considering, but not yet implementing sustainable investing strategies, meaning there is a major market opportunity for advisors to differentiate their practice through deeper ESG analysis and reporting.
Proxy voting is becoming one of the hottest topics in sustainable investing. There is a growing body of evidence that proxy voting and other stewardship efforts drive improvements in company social and environmental performance. Under increasing pressure from its client base, BlackRock announced it will allow its clients to decide how they want their assets to be voted at company annual meetings. BlackRock ceding voting rights could lead to a major shake-up if peers follow suit, as a 2019 study found that BlackRock, Vanguard and State Street collectively cast about 25% of the votes at S&P 500 companies.
Robinhood is taking personal investor engagement a step further, announcing it acquired shareholder engagement platform Say Technologies. Say helps investors write in questions and upvote which ones they want answered on earnings calls. This gives investors with as little as one share access to company management that was previously reserved for institutional investors.
What does this mean for advisors?
Advisors will have to take a more hands-on approach to proxy voting. As clients have more options to vote and actively engage with the companies in their portfolios, advisors will need to have confident conversations about implementing proxy voting policies that match their clients’ values. ESG conversations will move beyond basic exclusions to a more holistic sustainable investing approach.
- Facebook Allegations Highlight Greenwashing Concerns in ESG Portfolios
If you missed the headlines last month, former Facebook employee Frances Haugen leaked documents stating that Facebook engineers are fully aware of the social network’s negative impact on mental health and contributions to the spread of misinformation. The media frenzy around these documents has sparked public questioning of whether Facebook belongs in ESG portfolios.
What does this mean for advisors?
One of the biggest ESG risks for advisors is presenting clients with a portfolio that includes top holdings that the client is fundamentally against. Some of the largest data providers give Facebook high ESG scores due in part to its environmental performance, yet some investors may place a higher prioritization on mental health and hate speech. Advisors should get to know each client’s specific ESG goals to ensure they provide portfolios that align with their values.
The Ford Foundation announced it will no longer invest in any fossil fuel–related industries, and will invest more in climate solutions. In committing to fossil fuel divestment, the Ford Foundation joins almost 1,500 other institutions, including Harvard University, Dutch and Canadian pension fund giants PME and CDPQ, and the city of Baltimore, that made commitments in just the past two years. A week later, the McKnight Foundation took a similar approach, committing to net-zero carbon emissions by 2050, becoming the country’s largest private foundation to pursue a net-zero endowment.
What does this mean for advisors?
Many institutions and endowments are facing pressure from their constituents to implement sustainable investing policies for ethical and financial reasons. In particular, foundations and endowments may choose a variety of paths to address climate issues in their portfolios. Some prefer the public signal that comes with fossil fuel divestment, others will prioritize managing financially material climate risk, while others still will focus on the positive impact of shareholder engagement and investing in climate solutions. Advisors serving endowment and foundation clients should be equipped to help them implement all of these strategies.
Gabe Rissman is the president and co-founder of YourStake, a platform to help wealth and asset managers to build custom ESG portfolios and provide personalized ESG reporting.