A common issue with ESG funds among financial advisors is the one-size-fits-all approach; portfolios are built around an asset manager's choice of metrics, not the client's concerns. A startup wants to make it easier for advisors to tell the story of ESG investing based on the client's values.
YourStake was launched in November 2019 by two former Yale students active in the school's fossil fuel divestment efforts. The newest iteration of the platform includes an ESG personality type quiz for clients, companies, and fund screeners and what co-founder Gabe Rissman calls “methaphor metrics.” The startup now serves financial advisors across 100 firms representing over $200 billion in assets under management.
EQM Indexes, the index provider behind the Adasina Social Justice Index, today announced they'll use the startup's ESG and socially responsible investing data to build new ESG-based indexes.
“The challenge that exists in the industry is that a lot of times ESG is a score; it’s one-size-fits-all. Advisors communicate to their prospects or clients, ‘You have an 8.2 out of 10,’ and the prospect says, ‘OK, why?’ And the advisor would have to read an 80-page methodology document to be able to have a good understanding of that, and that’s very challenging for advisors,” Rissman said. “The other big challenge is that a lot of times ESG portfolios have top holdings that conflict with client values.”
For instance, a model portfolio may be invested in a lot of renewable energy companies that don’t have great board gender diversity.
“There was recently a list of the top five ESG companies in a particular index, and that had a tobacco and a mining company,” Rissman said. “That has eroded trust and credibility in ESG, and it makes advisors afraid. What we do is help advisors avoid that problem by providing that questionnaire.”
The tool takes advisors and their clients through a three-step process—the first being discovering the client’s values through the personality questionnaire.
YourStake constructed the 14-question survey to be more of a behavioral-style questionnaire, not simply one where the client checks the boxes of all the things they want to invest in or don’t want to invest in. It asks clients whether they agree or disagree with certain statements, such as “I avoid eating meat,” “Companies should pay a living wage even if it means employing fewer people,” “Society should fix problems like health care and education before devoting resources to climate change,” or “I go out of my way to avoid buying products that use forced labor.”
The tool then links the results to the reporting and portfolio research metrics that would be most relevant to that particular person.
The second step in the process is to help advisors diagnose their client portfolios based on those personality types. The third step is comparing the advisor’s ESG model with the client or prospect’s non-ESG portfolio and showing the impact differential of those portfolios. YourStake won’t just give an ESG score but rather numbers behind the impact.
For instance, an advisor might say, “‘With our proposed portfolio, you’d have 18% more women on boards of directors than your current portfolio, and companies will be emitting 52% toxic air pollution,’” Rissman said.
Advisors can also drill down to see which companies are driving that impact and why.
“We’ve had clients say, ‘I want to find out what’s going on with Celanese’s toxic air pollution because I live right by a plant.’ You can connect someone’s daily life with their portfolio with their values,” he said.
The “metaphor metrics” try and demonstrate the impact of the investors' portfolio. For instance, a metric might show how many asthma attacks the portfolio prevented, how many people the portfolio helped vaccinate or how much plastic it’s keeping out of the ocean.
The market for tools that can help advisors both talk about ESG and implement bespoke portfolios depending on the client's values is heating up. Act Analytics, an application to allow advisors and “wealth managers to have value-based conversations with their clients using a proprietary ESG scoring methodology” and bring “sustainability mainstream," was recently named a finalist in ScratchWorks, a fintech competition for the advisory space. In December, the company introduced a free tool called News Analytics, which uses real-time, natural language processing to identify companies in news stories and calculates an ESG ranking based on the information.
Rissman and his co-founder, Patrick Reed, met in 2012, while they were students at Yale. While Rissman was studying computational astrophysics, he got pulled into climate change activism, and he and Reed ended up running the fossil fuel divestment movement on campus. That led them to Yale’s endowment, where they were part of a student-run investment fund managing $100,000 of the endowment and where they gained firsthand experience in divesting and shareholder engagement.
The two also conducted a lot of academic research around ESG and sustainable investing, and found that there was a gap in ESG use in the retail financial advisor space.
“Financial advisors, wealth managers are not necessarily meeting—depending on the study—80-90% demand for ESG,” Rissman said. “What we were finding more and more and more of was that it was challenging for advisors to tell the story of ESG.”
For asset managers and index providers, the data gleaned from YourStake can be used to build more relevant portfolios.
“We have already collaborated with YourStake to provide the data infrastructure behind Adasina Social Capital’s groundbreaking Social Justice Index (JUSTICE) and are enthusiastic about the prospect of additional index-product collaborations in the future,” said EQM Indexes co-founder and CEO Jane Edmondson, in a statement. “We really like the fact that these are not just non-transparent scoring systems. There’s transparency. We have control; our clients have control over what inputs go into these models. You can create kind of a customized solution.”
The platform can help ETF creators bring greater transparency to why their portfolios look the way they do, something that has been a challenge in ESG investing, said Rissman.
“Someone that’s creating this ETF might select metrics that they care about, but don’t get to see which companies get flagged by which metrics, and that oftentimes leads to some disaster,” Rissman said. "There have been fossil-fuel-free funds that start out fossil-fuel free, but then they no longer become fossil-fuel free because they lack transparency into how the screens are actually being applied. YourStake provides these research tools for people to set custom thresholds and set their screens and set their index construction methodology of how they want to use ESG data with full transparency, so they’re not getting surprises.”