“My clients aren’t interested in sustainable investing.”
“There just aren’t proven sustainable investing products out there.”
“Recommending sustainable investing products isn’t consistent with fiduciary duty.”
Do these statements sound familiar? If they are the kinds of thing you tell yourself or your clients, you risk being seen as out of touch. Furthermore, you take the chance of alienating current and future clients who very much want to align their investments with critical environmental and social issues.
Did you know that more than $12 trillion in assets under management are engaged in one or more strategies of sustainable investment in the United States? This comprises more than 25 percent of the professional managed assets across the country and is a 38 percent growth from 2016 figures. Today’s sustainable investing is about much more than excluding tobacco stocks, oil companies or gun manufacturers. It’s also about reducing risk, finding best–in-class companies with strong environmental, social and governance (ESG) practices and delivering competitive investment results.
Studies have shown a disconnect between investor interest in sustainable investing and advisor expertise. For example, a survey from Calvert Research and Management found that 73 percent of advisors noted their clients are asking for sustainable investments, but only 17 percent said it’s a strategy integral to their practice.
This likely results from common misperceptions surrounding sustainable investing which we often see when US SIF conducts trainings with advisors across the country. We distill those issues below.
“My clients aren’t interested in sustainable investing”
As the Calvert survey shows, clients and potential clients are interested in sustainable investing. Nuveen’s fourth annual responsible investing survey also reveals strong—and growing—interest. Eighty one percent of investors surveyed stated they wanted to advance environmental sustainability, up from 73 percent in 2015. The number who said their investments should strive to make a positive impact on society rose from 75 percent in 2015 to 80 percent. Interest in sustainable investing was most pronounced among millennial investors, with 93 percent reporting strong interest in sustainable investing.
“Sustainable investing funds underperform traditional products”
Several research studies, including from Morgan Stanley, Barclays, Deutsche Asset & Wealth Management/University of Hamburg, MSCI, Nuveen/TIAA and UBS, have found no financial trade-off in the returns delivered by ESG funds relative to traditional funds. Additionally, the study by Morgan Stanley found “strong statistical evidence that sustainable funds are more stable” during periods of extreme volatility.
“Sustainable investing only involves public equity investments”
While sustainable investment strategies are widely available in the public equity markets, they also span the range of asset classes including green bonds and other fixed income, cash and alternative investments like green bonds, private equity and real estate. Your clients have plenty of opportunity for a full complement of sustainable investments in order to drive competitive financial returns. In fact, according to the US SIF Foundation’s Report on US Sustainable, Responsible and Impact Investing Trends, alternative investments that included sustainable strategies have grown to $588 billion in 2018.
“The fees relating to sustainable investing are too high”
You may think your clients will have to pay more for the privilege of making these investments but this is not necessarily the case.
Morningstar assesses the performance and expense ratios of mutual funds and ETFs—sustainable and conventional alike—with their peers by asset class and style. US SIF found earlier this year that of the 24 largest US SIF member funds with a track records of 10 years or more, Morningstar rated 14 as in the top 35 percent for performance over time (a 4-star or 5-star rating), and nine in the next 35 percent (3-stars). With regard to expense ratios, Morningstar said that 10 of these funds have average expense ratios relative to their peers, and seven have low or below-average fees.
“Sustainable investing isn’t consistent with fiduciary duty”
In 2005, global law firm Freshfields Bruckhaus Deringer concluded that ESG investing is consistent with fiduciary duty, and that the consideration of ESG factors is “clearly permissible and is arguably required in all jurisdictions.” A successor report in 2019 by two global investor associations, the Principles for Responsible Investment and the UNEP Finance Initiative, identified three reasons why ESG incorporation in investment analysis and decision-making processes is consistent with fiduciary duty - ESG incorporation is the investment norm, ESG issues are financially material, and policy and regulatory frameworks are changing to require ESG incorporation.
In the United States, the Department of Labor has offered reassurance that fiduciaries for private sector retirement plans may look at sustainable investing options and analyze ESG criteria in selecting investments. Its October 2015 Interpretive Bulletin notes that "fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors." In April 2018, the Department of Labor issued a lower level “field assistance bulletin” that generally reaffirmed its 2015 guidance while offering specific instructions on the qualified default investment alternative.
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