“We all need to do more.” Bank of America Chairman and CEO Brian Moynihan, June 2020
With this quote, Brian Moynihan announced Bank of America’s $1B commitment to aid local communities dealing with economic and racial inequality that’s been exacerbated by the coronavirus outbreak.1 In doing so, he helped pivot the already growing environmental, social, and governance (ESG) investment niche further towards becoming a mainstay of the wealth and asset management industries.
This announcement comes on the heels of record amounts of money flowing into sustainable investments. In 2018, socially responsible investing worldwide reached US$12 trillion, a leap of 38% in just two years.2 Investor interest has also been on the rise: in a recent Accenture advisor survey in North America,
73% of financial advisors surveyed said their clients are asking about ESG investments on a regular basis.
In light of this, asset and wealth managers are asking themselves “How can I grow my ESG offering and better service my clients and the world they live in?” To help firms answer this question, we’ve developed a three-step roadmap to help firms navigate the practicalities and challenges of ESG investing and realize the full potential it offers.
Pre-COVID-19, annual corporate sustainability reports were already becoming “business as usual,” with companies across every industry establishing clear ESG targets and measuring progress on a yearly basis. According to Global Reporting Initiative (GRI), an independent international organization that has pioneered sustainability reporting since 1997, 93% of the world’s largest 250 corporations now report on their sustainability performance, and 82% of these use GRI’s Standards to do so.3 And, before the pandemic, investors were already interested in understanding which companies were measuring these actions, and how specifically they were reducing their environmental risk exposure, supporting the societies in which they operate, and establishing good governance.
But as we emerge from the COVID-19 crisis and respond to the ongoing social unrest, the focus on ESG investing has exploded. Parts of our society have crumbled, and all are tasked with determining how we build back better. And in this new world, expectations have risen. It’s no longer enough for companies to take money and merely grow. It’s also no longer acceptable or accurate to say that there is a trade-off with sustainability and financial performance, as research quantifies the upside in investing sustainably.4,5 This new normal requires firms to grow in a way that makes our environment and our society stronger. And in this light, we have seen the interest in ESG become bigger and more balanced between the “E” and the “S” factors.
Time to act, by taking three key steps
All of this means it is now more critical than ever for asset and wealth managers to prioritize their ESG strategy and act.
Step 1: Choose your framework and explain your metrics
The first step is establishing the right framework and metrics to underpin a firm’s ESG strategy and ensuring it is both robust, credible and relevant. These foundational elements are vital because, while ESG investing has become more mainstream, implementing an ESG investing strategy is still a complex task. One of the biggest challenges is the current lack of industry standards and fragmented nature of ESG ratings frameworks.
In addition, managers should identify ways to present scoring information as accurately and understandably as possible—whether as an abstract score, scoring relative to peers, or year-on-year improvement. Investors want to track the ESG impacts of their investments in the same way as they monitor the financial returns and firms need to make this an easy and connected experience, especially as product availability expands.
For all of this to work properly, clients would also need to be educated on how to use the ESG metrics and understand what they mean for their investment objectives. Recent Morgan Stanley research found that 74% of millennials cited a lack of understanding as a key reason for not integrating sustainable investments into their portfolios.6 So tools and resources to educate clients will be vital for enhancing investment and retaining clients interested in ESG impacts.
Step 2: Reposition your product set while investing in innovation
The next step involves building on these foundations by reframing existing product sets to reflect the ESG brand, while also committing to invest in ESG-related innovation. Reframing the product portfolio is vital because, while interest in ESG investing continues to expand, adoption is still lagging behind.
The same research above by Morgan Stanley shows that only 52% of investors have invested in sustainable investments, and financial advisors taking part in our recent advisor survey in North America indicated
More than half of their clients had 25% or less of sustainable investments in their portfolios.
Much of the cause of this gap between interest and actual investment comes down to a perceived lack of availability of ESG investment products. Yet, achieving this may be more straightforward than it appears. While many asset managers are offering ESG-branded ETFs or mutual funds, what many customers don’t realize is that several household-name stocks and funds might also meet their ESG criteria; they just need to be labeled better to call out these ESG scores and attributes.
Lastly, and most importantly, firms should continue to innovate everyday as it relates to ESG product structure and objective. On the fixed income side, what started as Green Bonds quickly expanded to Blue Bonds, and most recently COVID-19 bonds. Yet, the industry can do more. Firms like Bank of America with its coronavirus package illustrate what is possible.8 Firms should be encouraged to invest in products and services which creatively and dynamically expand the “good” priority to increase ESG possibilities.
Step 3: Make it personal and illustrate the impact
Having put in place the appropriate ESG framework and metrics, and then repositioned the product set while investing in ESG-related innovation, firms would be well placed to take the third step on the journey: leveraging the full power of personalization to drive ESG investing by clients, and then providing them with clear reporting on the resulting impacts.
In an era where clients expect hyper-personalization from every interaction, research confirms that ESG investing is no exception. 84% of investors want the ability to select products that are more closely aligned with their personal sustainability interests—such as helping to tackle climate change, supporting community development or fostering gender diversity.9 And, this desire among investors for personal alignment is accompanied by a growing belief that their investment choices can make a real impact. For example, 71% of respondents in the same study agreed that their investment decisions could influence the fight against climate change.
But in order to personalize an investment, managers need to know what clients are in the market for and recommend an investment at the right time. Firms should be investing in data & analytics, artificial intelligence, and goals-based planning tools to more easily capture client goals and serve up appropriate investment solutions real time via a robo-advisor or a financial advisor. Already, robo-advisor firms like Ellevest through its Intentional Impact Portfolios10 and Betterment through its Socially Responsible Investing Portfolio11 are providing impact investment objectives as part of their offerings. Ensuring clients are aware of their ESG investing options—and equipping advisors to have relevant client conversations—will be crucial in continuing to close the gap between interest and adoption.
Finally, firms should make it simple and transparent for clients to understand the value. While providing quantitative ESG scores is helpful, clients also need to understand the qualitative narrative. Similar to the goals-based investing concept, while clients care that their investments beat the S&P 500, they care more about how this performance translates into results, i.e. when can they retire? Managers should apply these lessons to ESG investing and produce more sophisticated and humanized reporting on ESG. By investing in natural language generation (NLG) and data visualization tools, it can be easier to tell a compelling story about the impact a client’s investment is making. Perhaps a company has outperformed its sustainability goals by drastically reducing carbon emissions or achieved gender parity on its board of directors. Reporting on the story is just as important as the number.
Your next wave of business growth
With the experience of recent crises causing investors to focus more than ever before on how their investments impact the world they live in, basic ESG offerings will become table stakes. Here are three key principles to bear in mind going forward as you develop, evolve and fine-tune your ESG strategy:
- Clearly market what you have and innovate to create differentiated and relevant ESG solutions.
- Consider how new technologies and vendor partnerships could be leveraged to better service clients.
- Work with a trusted partner who understands the demand for sustainability and has experience developing and implementing comprehensive ESG strategies embedded at the core of the investment process.
If firms get this right, we all grow better.
Special thanks to Clara Purk, Manager – Accenture Capital Markets, Wealth Management for contributing to this blog.