As part of our ongoing research across the wealth management industry, we frequently speak to relationship managers (RMs) about their top-of-mind issues. These days, the conversations invariably touch on sustainability – and especially on how wealth managers can meet their clients’ growing desire for investments that make a positive difference for people and the planet.
To help achieve this, most banks now offer their high-net worth individual clients (HNWI) sustainability-focused investments targeting a broader set of values besides financial returns. But some are going even further. One RM we spoke to recently said her bank now offers its clients products that show the concrete actions being taken at the shareholder level.
How does this work? When the bank makes an investment in a company, its representatives – usually investment managers – are present at that company’s shareholder meetings, and advocate through shareholder activism for the implementation of sustainable practices in the business. These actions and the eventual outcomes are then communicated back to clients through the reporting on their investments.
Proactive engagement and reporting
This level of engagement is a far cry from wealth managers’ traditional approach. But it’s on the other hand exactly what many of the rising generation of clients are looking for.
It’s long been accepted that these—mostly younger—clients like their banks to offer sustainability or ESG investments. But now the “sustainable” label is no longer enough. Instead, clients want to lift the lid and look underneath to understand what sustainability actually means. For example, if the bank says it won’t invest in fossil fuels, what it is actually doing to monitor, influence and enhance investee companies’ impacts in that area?
The same question applies across all other aspects of ESG. And we’re seeing some wealth managers seize the initiative through increasingly proactive engagement. Examples might include a bank going to 10 of its biggest holdings, and quizzing them on their sustainability practices, diversity ratios, longer-term environmental impacts, and actions to help achieve the UN Sustainable Development Goals (SDGs) – and then sharing their responses with clients invested in them.
Some wealth managers are even going beneath the SDGs to monitor and report on individual indicators in investee companies. These can include metrics in areas like staff training, treatment of employees, and so on. All of which helps clients to get a clearer view of the impacts their investments are having.
Closing the disconnect
Clearly, not every client wants to lift the lid on sustainability. Some HNWIs might still be happy to invest in a discretionary portfolio focused on maximizing returns without worrying about ESG. But generational shifts mean the client base is steadily rebalancing towards those who do care about sustainability – and who want evidence that their investments are supporting rather than hampering it.
Proactive engagement with companies can help to sustain the relationship with these clients. As we’ve highlighted in our recent perspective on how to strengthen client engagement, many wealth managers are currently faced with a disconnect around ESG investments: while clients may share an interest in ESG, they often find that their advisers don’t provide them with a full view of ESG investments or the returns available from them, according to our research.
The way to close this disconnect is to show clients the positive impacts their concrete investments are having in the real world through active engagement and advocacy. However, the challenge for many wealth managers is that they have little experience or expertise in doing so.
Fortunately, even if wealth managers don’t have engagement and advocacy capabilities in-house, they can still access and apply them in their portfolios through specialist ESG funds. Some of these funds have developed highly sophisticated approaches for measuring and reporting on sustainability impacts – for example by mapping all of their investee companies’ revenue streams against the 17 UN SDGs and the 169 targets that underpin them. This type of insight can enable banks to “lift the lid” on sustainability for their clients. And this is not the only trend that we are seeing around stewardship. My colleague, Caroline Chambers from our Asset Management practice recently wrote about stewardship in a broader context.
A rising tide
As ESG investment become ever more mainstream, it’s important for wealth managers to grasp that it is not a passing fad. As the EU’s new Green Transition Fund underlines, there are now vast amounts of capital and resources flowing into sustainable projects and investments. This growing momentum is driving up returns – further confirming that ESG is here to stay for wealth managers and clients.
The message is clear. Profit and purpose can coexist. And by providing their clients with insights into the real impacts their investment are having, wealth managers can build deeper and more durable relationships lasting well into the future.