Advisors Are Helping Clients Grow Greener

By Steven A. Morelli

Sustainable investing is showing more green shoots this spring, as advisors help grow the segment by exposing clients to the option.

Although advisors say clients and prospects do not ordinarily ask about socially responsible investing, more advisors are telling clients they can put their money where their values are.

A recent Morningstar report showed another record spike in environmental, social and governance fund inflows in the first quarter.

“In the first three months of 2021, the U.S. sustainable fund landscape saw nearly $21.5 billion in net inflows,” according to Morningstar’s Alyssa Stankiewicz. “That’s more than the previous record for a quarter, $20.5 billion, set in the fourth quarter of 2020, and more than double the $10.4 billion seen one year ago in the first quarter of 2020. It was also about five times greater than first-quarter flows in 2019.”

Asset managers added 11 funds with sustainability mandates in the first quarter, Morningstar reported. Of those, 10 were equity funds and eight were exchange-traded funds. Most of the new sustainable funds available in the U.S. are actively managed offerings.

Besides the rising inflows, ESG is making news lately because the Biden administration last week issued a wide-ranging executive order for multiple departments to focus on the “intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments and companies.”

Part of that vast order is for the Department of Labor to consider issuing a new rule by September that would suspend, revise or rescind Trump-era rules requiring ERISA advisors to put fund performance above sustainability issues in client recommendations.

The DOL had said in March that it would not enforce the ESG rule, but at least one law firm is warning fiduciaries to be cautious. Patrick S. Menasco and Bibek Pandey of Goodwin Law said that the DOL’s light touch does not extend to litigation.

“While the non-enforcement policy offers real, welcome relief for investment fiduciaries (and, by extension, fund sponsors and others that provide those fiduciaries with investment products incorporating ESG strategies or considerations), it does not extend to private litigation risk,” the pair wrote. “Until the DOL formally changes the amended rule, it will remain the law and will govern fiduciary investment decisions under ERISA. As a practical matter, private litigation risk involving the amended rule will likely fall mostly on fiduciaries responsible for selecting investment options under participant-directed individual account plans.”

David N. Bize, CFP, First Allied in Dallas, said the wall between financial advice and ESG is a good idea. Advisors are putting their own ideals first with they bring up ESG investing, he said.

“For the boomer generation, ESG is a concept that is sold by the financial advisor, not bought by the customer,” Bize said. “In 20+ years, only one person out of 200+ has ever asked me about ESG (or similar predecessors).”

Bize went on to distinguish advising from what he said were essentially consumer preferences.

“ESG supports a moral/ethical/philosophical ‘cause’ similar to not purchasing products from a specific company because you don't agree with the company's processes, practices or policies,” Bize said.

'An Exciting Time For Investors'

Other advisors did say clients and prospects don’t necessarily bring up ESG, although more are, but have no problem with making clients aware of these options. (Please note that in discussing clients and funds, the advisors in this article were not necessarily speaking about ERISA-qualified funds specifically.)

Mackenzie Richards, CFP, SK Wealth in Providence, said his firm has significant interest in ESG investing, and he finds clients welcome the ideas.

“If clients aren't specifically asking for it, when we explain what it is and that it's an option, they almost always select this,” Richards said, adding that performance is becoming less of an issue. “We have begun to see ESG-focused investments doing so well on our screens that we are incorporating them into non-ESG portfolios. This is an exciting time for investors because you don't have to choose between feeling good about where your money is and great investment performance. We only expect this trend to continue and will continue to make ESG/socially responsible investing a priority at our firm.”

Amber Miller, CFP, CRISC, of The Planning Center in Minneapolis, said not many of her current clients are asking about ESG, but her prospects certainly are.

“About 10% of my clients are asking about values-based investing (most don't know the ‘ESG’ acronym), and about 75% of new prospects are asking about it,” Miller said, adding that her clients are becoming intrigued. “As a fiduciary, I also ask my clients if they are interested in values-based investing and about 95% of them want to learn more and eventually switch investments into the ESG/values-based investing strategies.”

Miller added that she feels she would be failing her fiduciary duty if she did not bring up ESG investing.

“It is a strategy with its own pros and cons. It is not my role to decide for a client if they want to employ such a strategy,” Miller said. “Additionally, values-based investing can mean so many things – to some it can be lowering carbon emissions, to others it’s increasing the number of women or POC on executive boards. It can also include religious filters for those who want to include or exclude particular industries or companies based on their faith. The client gets to decide what and by how much of any of these filters to include in their portfolio, including doing nothing.”

Speaking of filters, Arthur J.W. Ebersole, CFA, CFP, Ebersole Financial, Wellesley Hills, Mass., also said clients can add “screens” to their portfolios to ensure their funds align with their values.

“With advances in technology, investors are now able to customize portfolios in line with their goals and values in ways that were not possible in the past,” Ebersols aid. “ESG information still remains difficult to interpret and many data providers and businesses have quite different definitions of ESG, but these will hopefully be resolved through greater transparency as the market for ESG products continues to grow in the coming years and decades.”

Mitchell Kraus, CFP, CRISC, Capital Intelligence Associates, Santa Monica, Calif., said clients are warming up to ESG investing as they become more concerned about their own impact.

“I have my CRSIC designation, so maybe that attracts clients that are interested in ESG,” Kraus said. “I make it a point to ask every new client about ESG investing and many are not interested, but I have found many are coming back to me now to find out more. While they did not want ESG funds in their initial portfolio they are now curious about how they could increase returns, reduce risk and/or help make the world a better place.”

Christopher Lyman, CFP, Allied Financial Advisors LLC, Newtown, Pa., makes a point of talking about ESG to help clients recognize their impact.

“While it is still somewhat rare for clients to proactively ask us about it, I usually bring this option up with clients and I would say about 40% are all for it, 20% are not quite sure, and 40% don’t rate it as important enough to act,” Lyman said. “I will also admit that I am a very big environmentalist so I am making the effort to proactively bring this up with clients. I doubt many other advisors do the same.”

Although Lyman was not speaking about the current DOL specifically, he said in discussing clients’ array of options, he makes it clear that ESG investing can affect their returns.

“I do explain that you need to be OK with these funds having a return of 2% less a year than regular funds, which can easily amount to a difference in wealth of hundreds of thousands of dollars later in life,” Lyman said. “I also would discourage anyone who has a low probability of a successful retirement from investing in these funds because of the possibility to underperform.”

Lyman did add that ESG funds are not lagging so much anymore, with his financial analyst showing that the difference in returns has “very, very close at this point.” Lyman sees his role as more than the dollars-and-cents guy as consumers consider their impact and how they can be the change they want to see.

“Nothing speaks louder to companies than the all-mighty dollar, and if 40% of the public made it clear that none of their money would go to a company that does not at least make an effort to live up to these higher standards, things would change very quick,” Lyman said. “While capitalism is the best system we have for innovation, it does place innovation and profit above all else. So, it is up to us as investors and customers to make it known what we want and since profit will follow, so will these corporations’ actions.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].