Bringing ESG investing to clients is often more art than science

Experts say advisers who are introducing clients to ESG investing must start with flexibility and an open mind

Introducing ESG investing to clients shouldn’t be viewed as an all-or-nothing proposition, according to Jennifer Coombs, director of client success at ACA ESG Data & Analytics.

Speaking Thursday during the virtual InvestmentNews ESG Summit, Coombs cited the example of a pyramid to explain how and where financial advisers and clients can find a comfortable entry point into environmental, social and governance investing.

She described the base level as focused on the risk-return balance when it comes to ESG investing, while appreciating that investment performance often deviates from that of broad market indexes.

The next level, which Coombs calls the “values level,” factors in what investors care about in terms of risk and return and how those values can be reflected in a portfolio.

And then there’s the top level.

“That is the impact category, where you’re not only doing risk-return and investing with values, but you also want to see evidence that your investments have done something,” she said. “The goal is determining where your clients fall on that pyramid.”

Coombs was joined on the panel about integrating ESG into your advisory practice by Sarah Adams, chief sustainability officer at Vert Asset Management.

From Adams’ perspective, hesitancy about introducing clients to ESG investing can be most prevalent among older advisers, who might harbor overly general assumptions about the types of clients who would be interested in ESG causes.

“What’s happening is there are advisers with businesses that are long-standing, who might be baby boomers, and they don’t want to alienate clients for fear of feeling like they’re pushing their values on people,” Adams said. “Don’t be afraid to ask if clients are interested in ESG, because you might be surprised the person interested isn’t wearing Birkenstocks, so ask everybody.”

Once an adviser and clients have a foot in the door to the ESG space, the hard work begins of navigating the fast-growing space fraught with potential pitfalls thanks to a general lack of parameters and definitions.

On that note, Coombs and Adams say advisers need to keep an open mind and be prepared to dig beyond the first page of fund prospectuses.

“There’s a lot of moving parts that go into determining a good company, and it’s all relative,” Coombs said.

She cited the recent example of a client asking to avoid any investments in company that supported pro-life causes, which unearthed an investment in Target, a company that had made a donation in 2018 to an anti-abortion campaign.

“Binary answers of yes or no will not necessarily determine what a good company is,” Coombs said.

“Some topics can become a third-rail conversation, so we try to keep it simple,” said Adams. “Our approach is investing for risk and opportunity, and we consider the degree to which there is impact.”

This gets to the topic of greenwashing, where a company or fund is being presented as more ESG than it actually is.

“There are a few firms today that are not even abiding by their own standards,” Coombs said. “I think intent is a big part of it, and in the absence of a fixed set of standards we have to abide by, we have to consider the intent.”

Coombs said she starts with the investment prospectus, where she wants the ESG objectives to be highlighted “very clearly.”

“Anybody can slap an ESG label on a fund and make that claim,” she said. “If there is an impact element of the fund, nobody is going to sit on their hands and not talk about that. So that should be in the forefront of the prospectus. And if they put impact in the title of the fund, they ought to be able to prove that somewhere in the prospectus.”

Adams agreed that it is a “prospectus topic,” and that it is on the shoulders of the adviser to weed out greenwashing. But she added that the research doesn’t stop until the questions are answered.

“Picking up the phone and talking to a fund manager would be great, if people could do more of that instead of just reading what’s on the internet,” she said.

This story first appeared in InvestmentNews.