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Editor's Letter: October 2020

Advisors and ESG: Not a Natural Fit

In this issue is a lengthy and informative interview with Securities and Exchange Commissioner Hester Peirce.

Her views on the merits, or demerits, of investing via an environmental, social or governance lens is of interest.

The SEC’s reluctance to fully endorse ESG basically comes down to a view that corporations are supposed to be run to maximize shareholder value, not to meet quotas or mandates imposed by activists.

Funds that direct shareholder capital to these companies can use ESG criteria in their decisions but should be clear about their priorities—and, according to this line of thought, those priorities don’t have ‘maximum shareholder return’ on the top of the list. Running a company to ESG standards and maximizing shareholder returns may, in some cases, amount to the same thing, but they are not inextricably linked.

I gather many financial advisors share that view. We get letters from readers who think we publish too much on ESG, and they are sick of hearing about it. “Keep politics out of investing,” seems to be the complaint.

I’d urge readers check out a podcast we’ve recently done with Jonathan Hudacko, the CEO Just Invest, part of our series of podcasts with winners of the annual Industry Awards.

Just Invest won the award in the Asset Manager – Socially Responsible Investing category for their ESG reporting tools. Hudacko’s view is that more financial advisors would bring ESG investing to their clients if it were easier to for those advisors to tailor portfolios to the client’s values and outlook; a cookie-cutter approach to ESG investing, like most mutual funds or ETFs take, just doesn’t work for most.

The direct-indexing approach helps ESG investing move away from the kind of do-gooder, hippy, social justice vibe it has always had, a vibe that turns many advisors off. Instead it promises to make the portfolio a manifestation of a client’s own priorities, regardless of what those may be.

As a thought experiment, think of gun manufacturers. Generally speaking, they score pretty low on the “social” area of any ESG data provider, and ESG funds that have a position on that factor would tilt away from the issuers.

Yet can’t we imagine a values-minded investor who takes the opposite view? A second-amendment believer who thinks firearms have a place? It’s not a view I share, but this investor may want a portfolio that leans more heavily toward gun manufactures – is that not, in fact, a portfolio based on the client's values?

Financial advisors have been slow to bring ESG into their practices. Firms like Just Invest are making it easier, but I’d be interested to hear from advisors: What is it about this style of investing that doesn’t appeal? Or if it does, what would make it easier for you to have these conversations with your clients?

Reach out on this or anything else at [email protected]

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David Armstrong



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