EBI (Evidence Based Investing) has put together a series of online workshops to help advisers talk to their clients about ESG. On the first of these webinars, Sam Adams, Non-exec director at EBI and founder of Vert Asset Management, presented what he called A Sustainable Investing Primer. These are the key takeaways from his session which are all aimed at helping you talk to your clients about ESG.
There is an immediate challenge for advisers trying to highlight ESG investments, namely how to describe sustainable investing to clients in a clear and compelling way. Adams lays out a three step process to make this happen.
Your sustainable story – why?.. and why now?
Adams puts it clearly; a client will wonder why their adviser is bringing up sustainable investment. As an adviser it’s crucial to start with why you are promoting sustainable investments, and why you are promoting it now.
Advisers at Vert Asset Management find three compelling approaches to help explain ‘why’ they are talking about ESG, and two approaches to help explain why they are talking about it now.
The first, and possibly the most compelling ‘why’ approach, is the personal passion approach. Adams has a lifelong passion for climbing and skiing, so he starts the ESG conversation with his desire to preserve the environments he holds dear. This can be supplemented with a ‘why now’ approach, explaining how ESG is now an available solution of which there hasn’t been before. This combination creates a connection with the client, and offers the client a solution to help tackle unsustainable capitalism.
The client request approach is another way of starting the ESG conversation, if you are at a larger firm with lots of client facing people. This approach is to say that you are responding to the demand from your clients who want to invest sustainably. Again the reason to start the conversation now is because ESG is now an effective and available solution.
The third approach is investment led, your desire to talk ESG is because it’s a genuinely innovative and effective investment opportunity. This ‘why’ approach can be coupled with the thought leadership ‘why now’ approach. ESG is now a popular investment strategy, for example seven of the ten largest global pension funds use ESG.
This is simply to open the conversation, it should make up the first minute of conversation.
Your sustainable definitions
The next step is to describe what you mean by sustainable investing. In recent years there’s been an explosion in demand for sustainable investing and along with that there has been an explosion of products. Adams said; ‘none of the product providers are using the same words, or they are using the same words but they’re used to describe different things so who knows what your clients have been reading.’
Advisers should clearly separate value driven ESG investing from other values driven investment wrappers; such as Impact investing and Socially Responsible Investing (SRI). Whereas Impact and SRI are closer to philanthropy, ESG corresponds far closer to conventional investing. An Adviser should clearly define these three types of sustainable investment, and then be consistent with these definitions.
Your sustainable investment philosophy
This is not necessarily said explicitly, much like an advisers conventional investment philosophy. The sustainable investment philosophy needs to do two things; help you make smarter decisions with your capital, and help you explain those decisions to clients.
Adams outlines three components to help guide a sustainable investment philosophy – financial, societal, and personal returns.
The financial component should consider risk and return, tracking and performance, and of course cost. ESG investing involves extra-financial data that often goes beyond a company’s typical reporting process, helping to tune out risk. ESG funds perform almost identically to non-ESG funds, though there is an important conversation to be had around cost.
The societal part should answer the question; what does this do? Adams implores advisers to answer this question regardless of whether the client asks, and highlights two particular examples. First is that ESG evolves capitalism, half of all European professionally managed money is managed with some kind of sustainability consideration. A client can help add to that sustainable ecosystem of companies through ESG investments; improving capitalism and improving companies performance going forward.
Another way to express the societal returns of ESG investing is by embracing the future. Sustainable companies are the incumbents into the market, and are disrupting the status quo. By investing in ESG a client can help tilt the direction of capitalism away from unsustainable processes of the past.
The final component of a sustainable philosophy is the personal returns you and your client can have. People want to be part of the solution, and more recently they see their capital as a means of voting on the future.
Adams put these considerations in a broader context, saying, ‘everything in your life says something about you. Sustainable investing can reconnect someone with their capital, and inject some humanity into it.’
Stories and analogies
One of Adams’ favourite ways to propose a sustainable solution is with the organic food analogy. Organic food used to be rarer than it is today, when Adams saw more of it available he made the decision to buy it when he could. This was a simple decision, it didn’t change where he shopped, it didn’t change what he ate, and it didn’t even change his shopping list.
The outcome of this decision is marginal; maybe the nutritions a little better, and perhaps the cost a little more. However Adams likes that buying organic sends a signal to the store, and the signal the store then sends to the food industry; more organic food please. Adams used his capital as a means of voting on the future, and it made him feel better about his role in society.
Another means of story telling is with case studies, and there are numerous to choose from. Adams likes the example of the 2010 retrofit project on the Empire State Building. The project reduced its energy consumption by 38%, saved $4.4 million per year meaning the payback period for the project was only 3.1 years, and it had the Greenhouse Gas reduction equivalent of removing 20,000 cars.
Examples of ESG success stories are numerous, and if you include stories like the Empire State Building it shows that sustainability can mean operational excellence, it’s a positive thing that can be good for business.
Book your place below on the next EBI Webinars in this series which are taking place on: