Sustainable investing pioneer Amy Domini kicked off the InvestmentNews ESG Summit & Film Festival this week with the message that ESG is here to stay and financial advisers should be paying attention.
“The importance of integrating global goals with asset management is evident just in the numbers alone,” said the founder and chair of Domini Impact Investments, a $2.3 billion asset manager.
Domini said ESG data are becoming an increasingly important feature of how every company is examined and valued. That will continue to a point down the road when the information is not considered “ESG data” but just data, she said.
As the popularity of investing according to environmental, social and governance criteria continues to climb, Domini acknowledged some of the nuances and confusion related to semantics, but said she isn’t concerned about debating the differences between ESG, socially responsible investing, impact investing and other terms.
“The point is, do you believe finance has a role? And I do,” she said. “It’s very difficult to envision that we can get to ecological sustainability or human dignity without finance taking up the challenge.”
Domini’s opening keynote address was followed Wednesday by a session featuring two financial advisers who have made ESG investing a big part of their practices.
“This is not a space that lends itself to tourism or taking a light approach,” said James Frazier, a socially responsible investing adviser at Natural Investments, a firm that focuses exclusively on building ESG portfolios for clients.
While there are investors and financial advisers up and down the spectrum of commitments to ESG, Frazier said the truly dedicated investors won’t be fooled by an adviser making a half-hearted effort in the space.
“These investors are very committed, and are good at sniffing out a light approach,” he said.
Haleh Moddasser, managing partner at Stearns Financial Group, said that given the popularity of ESG investing, advisers also have to be extra diligent in sniffing out light approaches inside products and strategies.
“Once it became popular, it became easy for companies to just tack on something that said they were green-minded,” she said in a reference to the practice of “greenwashing,” in which funds and companies present themselves as ESG-focused to try and jump on the bandwagon.
But such challenges should not be a deterrent to investing in the space, Moddasser said. “We can’t just wait for perfection.”
Despite the strong recent performance by many ESG strategies, both advisers said they’re not seeing clients ask about ESG just for the returns.
Moddasser acknowledged the common argument that the ESG space in general is benefitting from the poor performance of companies involved in the fossil fuel industries, which most ESG strategies avoid.
“Fossil fuels could turn around, but I think we’re getting away from fossil fuels,” she said. “I haven’t had anyone come to me asking for ESG just for the better returns.”
Frazier, who is more of an ESG purist, said he would discourage investors from pursuing an ESG strategy just for the performance, which underscores the broader focus of most ESG investors and advisers serving those clients.
“I’ve lost clients by being ESG-focused and I’m happy to lose those clients because I’m at capacity,” he said. “You don’t need clients that aren’t focused on it if you’re committed to this space.”
At Moddasser’s firm, most of the clients are still allocated to traditional investments and strategies, and she said she has become more sensitive to opportunities to talk about ESG investing.
“It’s pretty easy to have this kind of conversation,” she said. “When people are interested in ESG, it’s pretty obvious. For example, they might come in and say they are just sick about school shootings and wish there were something they could do.”
For the most passionate, the idea of having one’s money make a difference overrides any potential drag that might come with investing in ESG strategies, Frazier said.
While he said that there is a “ton of academic research” showing there is no measurable performance gap when it comes to ESG investing, Frazier admitted the fees can be higher in the ESG categories.
“The biggest gap in that regard is usually from fees because these kinds of funds cost a little more, and it takes work to do that kind of research,” he said.
But in instances when an ESG fund’s fees are in line with those on traditional investments, Moddasser said investors typically opt for the ESG fund.
“Very few people I’ve ever spoken to, when realizing they’re not sacrificing returns and they’re impacting the environment, don’t want to do it,” she said. “Education is the key to marketing this.”
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