A decade ago, sustainable investing was viewed as an outlier, something that interested a select few investors. Financial advisors, too, saw it has as a complement to the typical investment mix. But that view is changing.
Clients are expressing interest in environmental, social and governance (ESG) issues and advisors are routinely integrating the approach into portfolios. The practice is reshaping wealth management.
“We at UBS have made sustainable investing our preferred recommendation to clients,” said Andrew Lee, who heads UBS Wealth Management’s sustainable and impact investing. “We do believe that sustainable investing is the future of investing.”
Lee’s comments were echoed by BNY Mellon Investment Management Chief Executive Officer Hanneke Smits.
Smits and Lee addressed financial advisors and wealth managers at the Forbes | SHOOK Wealth Management Virtual Summit broadcast on November 12.
“There is a clear recognition that these issues matter,” Lee said. “It’s clear that sustainable investing isn’t just for investors who are prioritizing sustainability; the opportunities are really relevant to all investors.”
Morningstar reported that assets invested in sustainable mutual fund and exchange- traded funds hit a record $1.2 trillion in the third quarter, up 19% from the second quarter.
The trade group US SIF, which tracks sustainable investing, said that one of every four dollars under management in the U.S. was invested according to sustainable investment strategies, a figure that totaled $12 trillion.
Educating investors is a major hurdle before ESG gains greater acceptance, Lee and Smits said. More than two-thirds of those surveyed by Newton Investment Management, a BNY Mellon Investment Management firm, expressed interest in ESG, but only 38% said they were knowledgeable enough to execute it.
Even the term ESG creates confusion, Smits said. Investors often don’t understand the difference between ESG, which highlights three specific pillars (environmental, social and governance) and sustainable stewardship, a more blanket term applied to sustainable investing.
UBS found that 66% of those surveyed said they thought ESG investment returns would be as good as or better than non-ESG investments, Lee said.
Lee said sustainable investing’s popularity stems from a desire on the part of investors to invest in a way that not only provides respectable returns, but that also has an impact on society. Lee said there is often a correlation between sustainable investing and an investor’s philanthropic interests.
Lee said UBS found that sustainable investing has become interlinked with company financial performance. Social themes related to health care and climate change dominate client conversations about sustainable investing at UBS.
Smits said markets are very good at pricing investments on a short-term basis, but they often miss longer term economic shifts. This mismatch provides an opportunity for sustainable investing, which has a longer-term view.
The popularity of sustainable investing come from the fact that investors can capitalize on economic shifts such as electric cars, plant-based foods and COVID-19’s impact.
“You start thinking about the future of work and there are winners and losers,” Smits said. “These are some of the big scenes we are seeing play out.”
Even as investment philosophy shifts, clients’ preferences should still drive the conversation, Lee said.
“The most important thing from an advisor perspective is understanding your client’s needs. Let’s make sure that our clients are incorporating it in a way that is meaningful. The decision how to invest always remains with our clients.”