ESG: The Momentum Continues
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How advisors and asset managers can harness the power of sustainable investing
When it comes to wealth management—in theory and practice—the only constant is change. Over the years, transformative shifts in the investment landscape have permanently altered the way assets are managed, the advisor-client relationship and the nature of investor expectations. Modern portfolio theory and the pivot toward low-expense, passively managed index funds are two examples.
But arguably the most recent seismic shift is still gathering strength: The demand for investments that integrate Environmental, Social and Governance (ESG) guidelines and related sustainable investment principles.
The roots of ESG investing can be traced back to the 1960s, but it was the early aughts when interest took off. Just three years ago, ESG assets accounted for $22.9 trillion in AUM.[1] As of year-end 2020, that number had surged to $31 trillion[2]; by 2030, it could top $100 trillion, according to a Deutsche Bank forecast.[3]
To be sure, ESG investing was already on the ascent when the COVID-19 crisis hit and the Black Lives Matter movement gained fresh momentum. But by all accounts, the events of the last year have stoked an even greater appetite for investments with the potential to change the world.
With this powerful trend unlikely to abate, there are steps asset managers and financial advisors can take to position themselves to take maximum advantage of it.
DRIVERS OF SUSTAINABLE INVESTING
In our opinion, the continued growth of ESG investing will be driven primarily by two factors:
- Investor demand: Demand for ESG-based portfolios is coming from both institutional investors who are increasingly incorporating sustainable investing principles into their buy and sell decisions, and from individual investors, especially Millennials, who insist that their investments reflect their values. In response, money managers have begun integrating sustainable investing throughout their entire research and asset management product offerings.
- Enhanced risk-adjusted returns: There is mounting evidence that companies that adopt sustainable practices produce higher, more enduring returns to their shareholders. Morningstar recently reported that 75 percent of its ESG-screened indexes beat their benchmarks in 2020, while 88 percent have outperformed over the past five years.[4]
WHY IT MATTERS TO YOU
Millennials are the next great generation of asset accumulators, and they are twice as likely as the overall population to invest in companies targeting social or environmental goals.[5] What’s more, they will soon have the money to put their beliefs into action, as they begin to inherit an estimated $30 trillion in wealth.[6]
The urgency to evolve is particularly acute for financial advisors. As Baby Boomers take distributions to fund their retirement, they are depleting their assets and thus a shrinking source of revenue. But the larger business risk may be the transfer of assets to the next generation, which can typically cost an advisory practice up to 70-80 percent of those assets.[7]
To retain and grow assets, asset managers and advisors need a business and branding strategy relevant to the growing share of investors who prioritize a sustainable investing approach when selecting an advisor and choosing investments.
CREATING A RELEVANT BRAND
Our experience helping asset managers and advisors develop meaningful brands that connect with targeted investor groups has taught us that successful brands share three essential traits.
- Authenticity: Sustainable investing is a belief system, both in the values it espouses and as a means to superior risk-adjusted performance. If you don’t believe it, investors will recognize the insincerity.
- Transparency: Honesty and transparency are essential in all marketing and communications. Opaqueness anywhere along the communication chain will invariably breed mistrust.
- Actions: Well-crafted mission statements and core values must be backed by tangible actions. It’s one thing to call for reducing greenhouse gases, another thing to actually do it.
Your brand is how your clients and community perceive you. An effective brand strategy serves to align their perception with how you wish to be seen; a great strategy, however, creates an emotional connection with individuals that leaves them proud to be associated with you. That in turn translates into competitive distinction, increased pricing leverage, higher trust, and greater client loyalty.
YOU NEED MORE THAN A GREAT LANDING PAGE
When building a brand centered on values-based advice and sustainable investment management, there are no shortcuts. It’s more than rewriting your website. Indeed, it requires a comprehensive approach and relentless attention.
For asset managers, that includes your communications, product offerings, content strategy, and even the channels through which you distribute your products.
For the advisor, it means everything from the relevant tools, processes and professional certifications that underlie your sustainable investment positioning to your community outreach efforts, and from the transparency of your fee structure to the presence of environmentally friendly office practices.
Actions, messaging, processes, delivery channels: When it comes to projecting your brand, everything matters.
[1] https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/from-why-to-why-not-sustainable-investing-as-the-new-normal
[2] https://www.nasdaq.com/articles/esg-investments-could-pick-up-momentum-in-2021-2021-01-04
[3] https://www.gobyinc.com/four-factors-drive-esg-investing-2021/
[4] https://www.institutionalinvestor.com/article/b1qthg6qk5gtzd/ESG-Index-Funds-Are-Outperforming-Mostly
[5] https://www.morganstanley.com/ideas/sustainable-socially-responsible-investing-millennials-drive-growth
[6] https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/financial-services/ey-sustainable-investing-the-millennial-investor.pdf
