by Zabeen Moser-Mawji
The demand for ethical investing is only going to grow, so wealth managers must think about how they can best meet it, writes Zabeen Moser-Mawji.
In the next 10 years or so, wealth managers expect to see $1.2 trillion transferred between generations. With it will come expectations by the new owners of this wealth about how it should be invested, in particular when it comes to environmental, social and governance (ESG).
There has been a discernible trend towards sustainable investing – investments that take into account environmental and social considerations – in recent years. Not so long ago it was a niche sector in which investors were prepared to take lower returns to satisfy their principles. Today it is mainstream, accounting for about half of all professionally managed assets. Returns have also improved to be at least comparable with other asset classes – sometimes outperforming them. But we haven’t seen anything yet. The coming wealth handover is set to turbocharge ESG.
Where once investors looked for low costs and high returns when choosing their wealth manager, now – as their profile changes – they are increasingly concerned with how such an individual can advise them on building a portfolio that reflects their personal values. It’s partly an age thing, with millennials wanting to ensure their money makes a difference. They want growth with a purpose.
For wealth managers, proving they can deliver is a key point of differentiation. Investors – and regulators – are now wise to greenwashing, whereby an organisation overstates its commitment to sustainability issues and actions. For example, in March the European Union agreed regulations aimed at stamping out unsubstantiated or misleading claims about the sustainability characteristics and benefits of investment products. Its member countries think this so important that they plan to do more in the coming years, including passing legislation obliging institutional investors and asset managers to consider sustainability when making decisions.
Given the trend to ESG – and that empty claims no longer pass muster – what can a wealth manager do to increase their ability to meet the demand?
It’s vital to have people within the bank who not only have a financial background, but who also know the ESG sector well. This includes people with experience of working as environmentalists and sustainability specialists, perhaps even with relevant charities. They know what investors are likely to care about, as well as the right questions to ask fund managers. They can also monitor investments to make sure their impact measures up to the investor’s expectations. The problem is that these people are in short supply, so recruiting and retaining them can be hard.
Recruitment will be easier for employers who can show rigorous policies on sustainability and diversity – sexual, religious, age or gender, etc. – and demonstrate transparent reporting on these, as well as on executive pay and the gender pay gap. So practise what you preach; it’s no good claiming you can offer ESG investments unless your own house is in order.
Some banks are also joining forces with prominent ESG players, almost becoming part of the ESG infrastructure. Swiss private bank UBP recently announced itself as a founding member of The Big Exchange, a UK-based, mission-led, mobile-first, financial-services platform aiming to open up investment and saving to everyone. One of the other co-founders is The Big Issue, a charity that helps the homeless.
Having said that, wealth managers shouldn’t lose sight of the fact that ESG investments are just one class of asset. While there are some pure plays, most will need to find a balance of investment choices to offer potential and existing clients. But an ESG focus could only be for the good – given that research last year from Axioma showed that companies with higher ESG standards typically record stronger financial performances and beat their benchmarks.
Zabeen Moser-Mawji is managing director of Orbium, part of Accenture Wealth Management