Interest in environmental, social and governance funds—and the closely related concept of impact investing—has skyrocketed in recent years, both from asset managers as well as investors, including sovereign wealth funds, foundations, family offices and retail investment advisory clients.
But the growing wave of attention—and the rapidly multiplying options available—has created a lot of confusion for advisors, according to Tim Williams, the director of education initiatives for the Money Management Institute, the nonprofit membership group for financial services and investment advisory firms.
“There’s so many different categories, and so much data to go with it, that suddenly we find ourselves in a whole new environment where continuous learning is not nice-to-have; it’s a must-have,” Williams said. “And not just from a client perspective in terms of the demographics changing. The investment landscape is changing dramatically.”
Late last month, the MMI released a report in tandem with The Investment Integration Project (TIIP) that gives advisors and due diligence investment officers in home offices a detailed framework to evaluate ESG investments. The report is part of a broader series of initiatives the institute has undertaken to help educate advisors and deepen their use of ESG and sustainable investing. That includes a series of live meetings between advisors and asset managers, as well as online courses and tutorials to help educate advisors on the topic.
Of course, advisors need to conduct their own scrutiny of the investment options that are available, but without an understanding of the typology or the intentions of the products and managers, many advisors are wary to broach the topic, according to William Burckart, TIPP’s president and a co-author of the report.
“A big reason that advisors won’t bring this up to clients is that they know what they don’t know,” he said. “There’s this huge risk with the more product that comes into the industry. Not all of these things are created equal.”
The growth has been hard to ignore; according to a report from the Global Sustainable Investment Alliance, more than $30 trillion in assets under management in 2018 were invested inside some sustainable investing framework, with some estimating that that could jump to $50 trillion in the next two decades. Last year, sustainable funds brought in $20.6 billion, a four-time increase over the previous year (which had previously been the annual record).
While much of that growth is from sovereign wealth funds and institutional investors, retail clients too have demonstrated a real interest in sustainable investing—when the concept is clearly articulated to them by their advisor.
The increase in assets has mirrored an increase in products; for example, the number of ESG-themed ETF funds increased 176% between 2016 and 2018, according to the Forum for Sustainable and Responsible Investment.
The number of new products is outpacing advisors’ ability to understand all of the options. Many advisors won’t dip a toe into the water for fear of getting swept under the current. But Williams warns advisors that ignoring the space is a mistake, particularly as clients themselves find it increasingly important; advisors who broach these types of conversations with clients deepen their relationships.
“What we’ve found is financial advisors have spent a lot of time getting to know the managers to understand all the different value-add components that they have,” he said. “The due diligence professionals at home offices are going to look at all of that from a corporate and platform perspective. But the advisor also needs to determine, ‘how do all of those particulars then fit into the conversations I’ve been having with my individual clients?’”
Advisors like Khloé Karova, who founded the Chicago-based firm Modern Capital Concepts in 2013, said advisors who want to grow their practices will have a natural advantage if they bring the concept of sustainability into the prospect and client conversations. Karova left Edward Jones to start her own firm, determined to focus on women’s empowerment and ESG investing options, and now partners with LPL.
But, she said, it’s crucial to make sure that the values the advisor claims to be screening for are, in fact, showing up in the portfolio—and that requires due diligence on the advisor’s part.
Karova said MMI’s educational program has been a valuable resource. The program is helping to create a common language advisors and asset managers can use when thinking through the issues of sustainable investing. “I think for any product out there, having to explain ESG (to clients) is a lot easier than explaining how an annuity works,” she said. “They are just growing like mold; how do you differentiate what’s real?”
For her portfolio, she uses Morningstar’s platform to screen mutual funds and calls asset managers and firms directly to gauge whether particular funds match her clients’ needs.
To broaden the reach, Williams said MMI will be taping “testimonials” from advisors experienced in ESG investing that should be useful for those just getting started, and the group will roll out a new online education curriculum on the topic in late 2020.
The online offerings are all the more necessary because smaller firms may not have the ability to do it in-house, Burckart said.
“They’re all grappling with how we most effectively meet the demand on the education and training side,” he said. “There are some firms who have developed their own proprietary research and training. But a lot of firms have struggled replicating that, or don’t have the resources to build out that support. There needs to be, at a baseline, an effective training utility that any firm can leverage.”