The COVID-19 pandemic has spurred more interest in environmental, social and corporate governance investing as global assets are expected to surge to $53 trillion by 2022, according to a Celent analysis published Sept. 10.
The potential growth in assets would be up from the $45 trillion that ESG investing is set to encapsulate by the end of this year, according to research from J.P. Morgan.
“Never before have environmental, social, and governance considerations been so relevant,” according to Celent’s Head of Wealth Management and author of the analysis William Trout. “Climate stress, racial and social unrest, and millennial-driven scrutiny of business practices across the globe indicate an ESG tipping point.”
For wealth managers, this ESG tipping point means no longer looking at sustainable investing as an asset class or portfolio strategy, rather, ESG investing is the new lens that determines how all investment decisions will be made, according to Trout.
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UBS Group, for one, has already announced its plans to offer sustainable investments to wealth management clients worldwide as the COVID-19 crisis underscores the need for more socially and environmentally responsible financing. This year, major sustainable indexes have outperformed their peers in traditional investing, said the bank, which currently manages $488 billion in core sustainable assets.
“The pandemic has brought the vulnerability and interconnected nature of our societies and industries to the forefront of investors’ minds and shown that sustainability considerations cannot be ignored,” Tom Naratil, co-chief of the bank’s $2.6 trillion global wealth business, said in a statement last week.
BlackRock also recently announced that it would be integrating ESG into all actively managed portfolios by the end of this year.
Moving forward, advisers should tap modern portfolio management tools via turnkey asset management platforms to customize clients’ portfolios based on an ESG criteria, Trout said. “That criteria from investors is more sophisticated today,” he said. “From a tech standpoint, advisers should use rebalancing software to customize and scale as needed.”
Advisers should also note that fractional shares allow investors with limited wealth to get involved with ESG investing, according to Trout. The democratization enabled by fractional shares also means that multiple strategies can be economically packaged within a single account.
“Even actively managed strategies can be included, although, once more, operational agility may be required to address the increased frequency — and unpredictability — with which these strategies reconstitute,” he said.
As the confluence of social, economic and market factors catapult investor demand for ESG investing, advisers will have to find ways to meet the needs of investors.
“In the past, the industry was always interested if sustainable investments outperform traditional investments,” Trout said. “Today, the narrative for advisers has changed to: ‘How do I respond to this new world where ESG investments are the de facto rule?’”