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The spring of 2020 was a blur.
We were knee-deep in a worldwide pandemic with nothing to watch but the news and Michael Jordan’s The Last Dance. I took an active approach to mitigate client concerns about the pandemic, the politics, and how it all affected their portfolios. But days after the George Floyd killing, I felt like I needed to do more.
I had heard about sustainable, ESG and impact investing. But it was still in its infancy. Only a couple of my clients had asked about it. I went to my email inbox – the encyclopedia of all things I mean to read “later” – and dug up an old invitation to watch a webinar. The subject was sustainable investing, and the time was convenient.
I signed up.
Over the course of the webinar, I learned that institutional, high-net-worth, female, gen X, and millennial clients were interested in sustainable investing. The group with the lowest percentage of interest was financial advisors (at 6%). I was embarrassingly part of the 94% not paying attention. I committed to learn more.
A funny thing happens when you “commit” to a cause; opportunities make themselves known. An advisor on Michael Kitces’ Advisor Success Podcast was featured. I contacted him and he obliged a conversation. He had been in the sustainable investing world for 11 years and here I was, bending his ear. The last thing he said was “Welcome.” He exemplified the abundance mindset and hoped more of our peers would follow. Later, two sustainable investing advisors were featured on the XYPN podcast. I contacted each of them and they shared their experience and passion for this kind of investing. Motivated by the professionals I met, I accelerated my learning by using my pandemic bonus time to study.
Education
My search eventually led me to the US Forum for Sustainable Investing (US-SIF). As members of the Global Sustainable Investment Alliance, US-SIF collaborates with other regionally based sustainable investment organizations around the world to “deepen and expand the practice of sustainable, responsible, and impact investing through intentional, international collaboration.” It offered a free, 30-minute course (which I took) and a three-hour CE course entitled “Fundamentals of Sustainable and Impact Investment.” Instead of earning some CE, I opted for their highest level of education: a professional services designation they designed in collaboration with Kaplan’s College for Financial Planning® and Associate Professor Jennifer Coombs. The Chartered SRI Counselor™ (CSRIC®) took me about 75 hours to complete and I got what I was looking for: accelerated professional development in an area that demands a foundation of knowledge.
You know an adviser is serious about sustainable investing when they put wind turbines on their website! We did that in August of 2020, which was a commitment to our clients, prospects and centers of influence that we were “all in.” Taking the time to learn the foundational history of SRI, the different approaches and the many options for portfolio construction gave me confidence. US-SIF defines sustainable investing as “An investment discipline that considers environmental, social and governance (ESG) criteria to generate long-term competitive financial returns and positive social impact.” I define it as a form of active investing that incorporates analyzing additional data to increase an investor’s realization of value.
ESG integration
The criteria are the underlying factors of all ESG strategies. Using ESG factors to evaluate investments has become politicized, but that does not mean ESG is political. The most common argument against ESG is that it reduces performance. Not among my clients! Every one of my clients invests for a positive return tied to their financial plan. Some specifically asked whether ESG criteria demanded poorer performance. The answer is “no.”
There are five methods for incorporating ESG analysis. The one we hear most about is negative/exclusionary screening of companies. Our older colleagues are often anchored to the early years of “socially responsible investing” in the 1970s, when global behemoths like Phillip Morris (tobacco) and Exxon (fossil fuels) were screened out of mutual funds in the sustainable space. Those two companies were also the most profitable; if you screened them out, you were guaranteed to have lower returns.
The most popular method of ESG analysis in the United States is called ESG Integration. This allows investors and/or advisors to start with the universe of investments, apply criteria specific to their personal investment strategies and identify investments accordingly. This is a form of active investing that will do well in some markets and not as well in others. But that doesn’t make ESG Integration much different from value, growth, smart beta, momentum, dynamic asset allocation, tactical asset allocation investing or other strategies.
More to know
Before the spring of 2020, I was partially right: The regulation around SRI/ESG/Impact investing was nascent. But this investing style goes at least as far back as the Quakers. There is a long history that proves its viability and more than 2,000 empirical studies that show little absolute difference in performance by adopting ESG as a criteria for analysis. As advisors we could all invest in index funds, relying exclusively on efficient market theory, and call it a day. Or we can select techniques that rely on efficient market theory with a layer that adds some additional value (alpha). Most of us try to do that. Let’s debate something else; kick the politics out of our investment debates and let client returns speak for themselves.
Jason Howell, CFP®, CPWA®, CSRIC® is president of Jason Howell Company, a family wealth management firm that uses sustainable and alternative investing practices to help accredited investors develop into stakeholders of their communities.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
