Given the flurry of terminology, flood of investment product marketing and dizzying amounts of data, many advisors don’t feel comfortable having the “sustainable investing” conversation with their clients.
Yet there is plenty of research to suggest clients would welcome it, said Cheryl Gustitus, executive vice president of Morningstar-owned Sustainalytics, a sustainable investing data provider, during a panel on sustainable investing at the Morningstar Investment Conference.
The terminology around the investment philosophy is the first obstacle, whether it’s called sustainable investing, impact investing, environmental, social and governance investing—the definitions and lines of delineation between them are not always clear.
One way to cut through the noise is to couch the conversation with clients in terms of “personal” investing, Gustitus said. That fits with what advisors do best, she said. “Advisors are the best at that personal interaction with their clients.” Creating portfolios that reflect their values can be a natural part of the client relationship.
“Definitions and terminology can have a big impact on an advisor’s success or not,” said Kristina Van Liew, managing director of Graystone Consulting. “But you can’t take a one-size-fits-all approach.”
Unlike traditional investment advisors, impact advisors need to think in three dimensions—risk and return, as well as impact. Advisors quickly learn that it requires a different conversation, a unique take on a client’s goals—and in turn a unique portfolio built around those values and also a different approach to performance reporting.
“Everyone’s definition of positive impact is different, so no two programs can be alike,” she said.
The client discovery process becomes much more important in sustainable investing, said Van Liew. “It’s incumbent on the advisor to listen closely and think carefully about building the portfolio” that suits the client’s objectives.
“You don’t do that by just looking for investment products” or funds with the right ESG labels, she said.
Adding to the confusion around terms is the quickly increasing amount of data around environmental, social and governance qualities of investments.
“It’s a data race,” said Gustitus. “Not just securities coverage. But in terms of data points that underly the mechanisms for advisors to be able to report in useful and meaningful way to clients.”
One panelist likened the confusion to the early days of ETFs or 529 Plans that had to be carefully explained to clients.
“It’s like those examples but on steroids. It’s not just hard to explain, but it means something different to every investor,” said Oliver Stracey, executive director and head of sustainable investing marketing at J.P. Morgan Asset & Wealth Management.
Stracey said J.P. Morgan has for the past five years been investing heavily in data aggregation and reporting around ESG data that can be used not just in impact investing but for all active portfolio managers across the firm, as these kinds of non-financial but still material disclosures around, say, carbon footprints or boardroom diversity, become increasingly tied to investment decisions.
“It’s still something of a niche business, and largely dismissed by investment consulting community,” Van Liew said. But advisors who can succeed in it will find the skill “in high demand.”
“It creates more endearing and sticky relationships. Investments have taken on a new relevance,” she said. But taking such a personal approach to a clients portfolio means advisors can’t fake it with an off-the-shelf investment fund.
“This is a category about authenticity. You have to be authentic to do the work,” she said.