It’s a familiar scenario for many investment advisors: their client has expressed an interest in sustainable investing, but concerns remain. That sounds appealing, but I don’t want to compromise returns. How can I be sure that the underlying holdings truly represent my personal values? Is there even a way to measure the impact I’m having?
While the world of sustainable investing has come a long way in the past decade — 26 percent of U.S. assets under management now employ socially responsible investing (SRI) strategies — it is still frequently met with skepticism by investors. Given widespread use of vague jargon, as well as industry-wide variations in methodology, consistency and transparency, it’s not surprising that investors harbor hesitations.
There isn’t necessarily going to be one definition of what it means to be a sustainable investor; after all, it means different things to different people. But for those who do have a clear sustainability credo, the investment solution should reflect those values.
Our approach is simple, and recognizes one unmistakable truth: sustainable investing is not one size fits all. Clients have their own unique sets of values and, as a result, are often sensitive to particular issues — avoiding CO2-intensive businesses or focusing on women-led organizations, for example. We enter the picture to incorporate those values at the same standard of quality, transparency and accessibility expected of any credible financial investment, offering advisors the tools to attract and retain clients who wish to align their financial portfolios with their ethical convictions.
At Ethic, we are proud to be a part of the movement to accelerate the global transition to sustainable investing. As client demand continues to grow, here are some questions investment advisors should expect, welcome and be prepared to help clients answer.
Performance: "Does sustainable investing mean I have to give up returns?"'
We believe that companies that pay attention to sustainable business practices have the potential to outperform those who do not. We’re not alone here. JP Morgan, Blackrock, Goldman Sachs and other preeminent financial institutions agree that investment strategies that consider environmental, social, and governance factors don’t compromise returns — and can even exceed the benchmark.
Even those that remain skeptical of sustainability’s ability to generate alpha can still benefit from Ethic’s approach: incorporating sustainability personalization while tightly tracking the underlying benchmark. We accomplish this by taking sustainability criteria, financial considerations and tax objectives into account, and overlaying the benchmark to create an optimized portfolio that minimizes active risk (tracking error). This approach enables our investment advisors to align their sustainability offering with their current investment process, index exposure, and most importantly, allocation.
Simply put, our goal is not to beat the benchmark, nor is it to underperform. Ethic utilizes a third-party quantitative model that optimizes to track the underlying benchmark as closely as possible. Thanks to this, a conversation about sustainability becomes more centered on a client’s values, than a justification for why a strategy will beat the market or not.
Our platform enables advisors to engage with their clients goals and values, rather than discussing stocks, performance and numbers. The image below is an example of how Ethic helps advisors tell this story, and answer questions regarding returns trade-off. This strategy backtest demonstrates how an optimized portfolio (Ethic portfolio) performs vs the benchmark (S&P 500) over a 4-year period. The goal is to minimize tracking error, so the less space between our performance chart and the benchmark, the better.
Lack of Access to Product: "Are there investments that I can customize to align with my values?"
There’s no shortage of sustainable investment strategies. However, oftentimes these “off the shelf” products don’t match a client’s specific priorities and offer little flexibility to accommodate them. Many of our advisors come to us to create a custom sustainable investment solution that fits their firm’s views or aligns with a client’s values.
We understand that that’s rarely a simple process. Defining and acting upon your clients’ beliefs may not simply be a case of 'reducing carbon emissions' or 'cutting out any company involved in tobacco.' Our tools therefore allow for nuance.
For example, a client may want to invest in companies that ensure equitable labor policies and practices, or those that are judicious in their safeguarding of sensitive data. Some may seek to divest from private prison companies, or limit their exposure to companies that are even tangentially involved in the production of palm oil. If a client wants to screen out businesses that are involved in tobacco product manufacturing but not tobacco distribution, our tools permit that nuance.
We empower our advisors to be proactive with sustainable investing conversations, helping them to build investment frameworks that are customizable to the sustainability needs of each client while aligning with their current investment allocation. We are flexible in our approach and can utilize tilts, screens, exclusion lists to ensure alignment with your investment strategy. These sustainability frameworks create an opportunity to engage with your clients, learning more about the issues that matter most to them and demonstrating your commitment to meeting their needs by creating a portfolio that is aligned with their values and your investment allocation.
The expectations of clients are rapidly evolving, and personalization needs are expanding. We built our investment solution to be flexible enough to help you manage money, achieve goals and align your portfolios with values.
Measurement and Reporting: - "Can you show me what impact my investments are having?"
Investors can’t trust what they can’t understand. When it comes to social and environmental impact, measurement can be especially murky. That’s why clear tracking and reporting of sustainability metrics is an essential part of Ethic’s technology platform -- we believe impact reporting should be simple and communicated in real-life terms all clients can understand.
Let’s say you have a client who wants to fight climate change by reducing their exposure to carbon-intensive businesses. Through our platform, we evaluate your current benchmark for sustainability enhancement opportunities and create a cleaner alternative powered by multi-factor optimization. How much cleaner? One metric we provide is carbon emissions ownership; this indicates what share of a company’s total annual carbon emissions are actually “owned” by a given investment position. Then we translate this metric into familiar terms: one of our clients reduced their carbon ownership by 98 metric tons of carbon emissions annually — equivalent to the emissions from driving an average car 240,196 miles or burning 227 barrels of oil — by reinvesting in an Ethic portfolio (see image below).
What these questions represent to advisors is opportunity, if they choose to take it. Our platform empowers you to showcase your leadership in the sustainable investing by aggregating impact metric across all of your clients. Advisors should celebrate the chance to open up an entirely new dialogue with their clients and truly discover what they care about. As sustainable investing continues to see tremendous growth in both demand and adoption, it’ll become more important to have a solution that is flexible. If you have concerns about the ability to effectively engage clients and are looking to create a sustainable investment offering please contact us.
In order to take advantage of this opportunity, advisors must feel confident answering the questions we’ve discussed above, and guiding their customers to a solution tailored to their values. Finally, at all costs, advisors must not shy away from the conversation, because that’s when this golden opportunity for a deeper, richer relationship presents itself.
Jay Lipman, a co-founder of Ethic, is driven by the need to address climate and environmental risks with the resources to which we each have unique access. He has been ranked among the Forbes 30 Under 30: Social Entrepreneurs. Born in the UK, he now lives in San Francisco. Previously, he managed the capital of ultra-high-net-worth investors in Deutsche Bank's cross-asset capital markets structuring and sales team.
Melissa Mittelman creates content at Ethic and is an alumna of Bloomberg News, where she covered private equity & deals. Melissa previously worked at Deutsche Bank, providing institutional, cross-asset sales coverage for ultra-high-net-worth investors.