Misconceptions and miscommunication may be preventing skeptics from seeing the bigger picture.
Environmental, social, and governance (ESG) investing — or “sustainable investing” — continues to gain awareness, acceptance, and assets. So why does skepticism still run so deep among many advisors? Perhaps part of the answer lies in a lack of clarity.
We invited Kiley Miller, head of ESG product development and management for Envestnet PMC, to share her views with The Flexible Advisor. Kiley spent more than three years at Sustainalytics, and is currently on the team that runs sustainableme.today —a source of practical information about integrating sustainability in all aspects of life.
Sustainable investing includes a range of interconnected approaches addressing environmental health, social equity, and long-term economic performance.
Advisors might dismiss ESG if they fail to understand the important distinctions between ESG approaches.
Advisors who discount the potential merits of sustainable investing may miss out on notable value propositions it can bring to their practice.
“We need to better communicate the intention of ESG information,” said Miller. “Sustainable investing encompasses a range of approaches that recognize and address the interconnectedness between environmental health, social equity, and long-term economic performance.”
These approaches fall into three primary categories:
These strategies apply a much more focused approach, with ESG information being the central tenet of the investment philosophy and decisions.
While several approaches fall under the “ESG” umbrella, some advisors might dismiss ESG out-of-hand when they fail to understand the important distinctions between them.
Inconsistent messaging is a significant challenge across the industry. As Miller says: “The wide range of terminology and taxonomies for sustainable investment approaches is intimidating. We need better transparency, and better accountability, from managers on their approach.” She does note that the SEC is working on proposed requirements for investment managers on ESG claims and related disclosures. “Hopefully that will entail more standardized language and a clear taxonomy for managers to describe their approach.”
Another unfortunate source of misunderstanding: oversimplification. “I don't like the whole notion of ‘doing well and doing good’,” Miller said. “Everyone has their own interpretation and definition of ‘doing good.’ Every investor has their own set of values and belief systems. A blanket statement that categorically simplifies this space, oversimplifies this space. And I think that as an industry, we need to be better.”
“Sustainable investing encompasses a wide range of investment approaches. You can't really bucket them all together. You have to find the right approach for the client.”
--Kiley Miller, Director of ESG Investment Solutions, Envestnet
We asked Miller how she addresses the three most common objections she hears from advisors.
Miller suggests that advisors who discount the potential merits of sustainable investing may also be missing a notable value proposition it can bring to their practice. “We're seeing millennials increasingly turn towards self-directed investment tools. They're more comfortable with technology and they've gathered assets in the context of a 10-year bull market. They aren't afraid to take risks. But we know that this cohort would benefit from a more holistic financial plan. One way to engage is with sustainable investing.”
Sustainable investing also adds a notable dimension in personalized advice. Miller notes, “As investor needs evolve toward more customized investment approaches, advisors should really arm themselves with a deep understanding of who their clients are, what they stand for and how they want to really put their money to work in the world. That results in higher retention. Advice these days is increasingly commoditized, and no two clients have the same values. So that personalization can really act as a differentiator.”
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The bottom line: “Sustainable investing offers another opportunity for advisors to have deeper, more meaningful relationships with their clients.”