Rosalind Evans
Don’t hesitate to question your financial consultant rigorously. The last thing you want is to discover later that your investment portfolio isn’t as ethically grounded as you assumed.
The surge in sustainable, responsible and impact investing (SRI) has piqued the interest of many investors keen on exploring its suitability for them.
The Sustainable Investment Forum, US SIF, states that approximately $8.4 trillion are invested in sustainable investment strategies across the U.S. This equals one in every eight dollars managed professionally.
Despite the criticism of responsible investing, adopting ESG (environmental, social, and governance) metrics in portfolio construction is merely sensible. As a fiduciary, I must be well-informed about potential investments, and ESG metrics hold as much weight as conventional, fundamental indicators.
It’s vital to comprehend the distinction between ESG and sustainable investing. ESG constitutes the metrics or data that aid your adviser in deciding your investments. Sustainable investing pertains to the end portfolio. Some investment managers may attempt to overlay ESG risk metrics on a traditional index like the S&P 500. Although this could result in a superior portfolio to the initial one, it usually still encompasses fossil fuel companies and other non-sustainable corporations.
An authentically sustainable investment portfolio is carefully constructed, probing into, “Which firms are poised to contribute towards a more sustainable and resilient world?” It offers a fresh perspective on an emerging economy.
Here’s an analogy to illustrate the difference: An ESG index with reduced ExxonMobil exposure is “less detrimental.” A portfolio excluding the company is better. However, a portfolio substituting it with First Solar epitomizes sustainability.
In this context, here are three critical questions to ask your financial adviser concerning responsible investment:
1. What is your level of expertise in sustainable investing?
While this practice has existed for years, only a handful of advisers specialize. Brokerage firms across the spectrum have introduced ESG portfolios to their offerings, but not all advisers have familiarized themselves with the intricacies of SRI. Seek advisers holding the CSRIC designation, denoting that they are a Chartered SRI Counselor having completed a relevant course.
2. How will you prevent greenwashing and deliberately craft a sustainable portfolio?
ESG portfolios often assembled by brokerages may include greenwashed ESG index funds or ESG funds that aren’t genuinely sustainable. These portfolios are marginally improved versions of traditional stock indexes. Many individual investors are keen on a portfolio reflective of their values. A generic ESG index fund probably won’t fulfill your preferences. Knowing which companies the adviser is removing from or adding to your portfolio is crucial.
3. Do you collaborate with external managers?
A practical way to sidestep potentially biased investment suggestions is for the adviser to work with an external SRI portfolio manager or separately managed accounts, commonly referred to as SMAs. In this setup, your adviser partners with the external portfolio manager to handle your investments while continuing to operate your relationship. It’s an ideal blend!
Engaging in value-driven investment can sometimes lead to awkward discussions with your current or potential adviser. However, it’s crucial not to hold back on posing challenging questions. You wouldn’t want to discover a year or two down the line that your investments include corporations like ExxonMobil and DuPont, which is plausible with some “less detrimental” ESG index portfolios.
These three questions are a springboard to help you become a more responsible investor. Depending on your circumstances, values, and objectives, you could pose countless other queries. Before your meeting, jot down a list and don’t hesitate to explore other experts if your adviser isn’t adept at devising a sustainable portfolio in line with your values.
Navigating the complexities of sustainable investing can be challenging, but with the correct set of questions and a skilled adviser, it doesn’t have to be daunting. Remember, your investment choices should reflect your values, and it’s worth ensuring your portfolio meets those standards. Don’t be afraid to advocate for yourself and seek the advice of experts until you find the one who understands and respects your desire for a genuinely sustainable investment.
