Is Impact Investing Growing Too Fast?
Wealth management firms are rushing to grow their environmental, social and governance investing capabilities, introducing high-profile marketing and analytical tools aimed at both advisors and their customers.
Morgan Stanley Wealth Management in late July launched Impact Quotient, an investing data and analytics application designed to help brokers assess client portfolios’ exposure to, and alignment with, ESG objectives. The firm oversees more than $28 billion in client assets on its impact investing platform of some 120 strategies, and says 75% of its advisors use at least one strategy while 37% of them use five or more.
Bank of America in January rolled out a fund research tool called Fund Story for self-directed Merrill Edge clients. BofA oversees $22.65 billion of assets in ESG mutual funds, ETFs, separately management accounts and directly in equities, green bonds and other “sustainable impact” investments across its Merrill Lynch and private bank platforms.
UBS in January began rating some equities and bonds across six ESG metrics, following the rollout of a similar service for mutual funds last year. The Swiss bank had about $313 billion of what it calls “sustainable investing” assets as of the end of 2018 across its global wealth and asset management divisions.
Industrywide, investors poured about $8.9 billion into ESG-leaning U.S. open-end mutual funds and ETFs in the first half of 2019, compared to $5.5 billion during all of 2018, according to Morningstar.
To be sure, many U.S. brokers and advisors remain cautious about recommending what some see as gimmicky do-gooder investments with relatively low returns. Not too long ago, the bulk of funds claiming to have ethical investing biases were simply those that excluded so-called sin stocks in the tobacco, liquor and firearms industries from portfolios.
The biases are reinforced by failure of some fund companies to do comprehensive product development in their rush to jump onto the socially-responsible trend. Such firms simply tweak existing strategies with an overlay ESG label, said Kimberly Flynn, managing director at alternative investments-focused asset manager XA Investments.
“With so many mutual fund managers now claiming to be ESG managers, we see some ‘green-washing’ in the market,” she said. “Advisers are not interested in passive ESG, or quantitative ESG strategies where they give up return in exchange for a perceived ESG benefit.”
She also questioned whether broker-dealers are putting the cart before the horse by investing in high-profile marketing campaigns for sustainable investing without proper education of advisors and managers.
The most incisive attack against the potential manipulation of customer interest in the category, and the lack of research standards, has come from SEC Commissioner Hester Peirce.
“ESG is broad enough to mean just about anything to anyone,” she warned in a speech in June at the American Enterprise Institute. “The ambiguity and breadth of ESG allows ESG experts great latitude to impose their own judgments, which may be rooted in nothing at all other than their own preferences….Some ESG scores are grounded in inaccurate information”
But investor demand for the category is real, according to advisors.
“So many clients, whether individuals, families or institutional, are asking questions and raising demand for it that advisors are finding that pretty much they have to be responsive in some way,” said Mark Sloss, a partner at Summit, New Jersey-based RIA Wilde Capital Management and CEO of ESG consultant Regenerative Investment Strategies.
Adam Bernstein, an analyst at Gitterman Wealth Management, a New Jersey RIA overseeing more than $450 million of client assets, attributes the growing ESG asset flow to the fact that many funds were founded near the start of 2015, giving them the three-year track record that investors and advisors like to see.
“Three years ago, you couldn’t find one article a month on ESG,” he said, “and now you have maybe 30 a day.”
Dynasty Financial Partners, which provides products, sales and trading services to about 50 registered investment advisory firms, added ESG products created by asset manager Ethic to its $16-billion turnkey asset management platform in July. Ethic’s calling card is constructing customized ESG portfolios to help RIAs address particular client ESG preferences, according to Dynasty.
Dynasty and Fidelity Investments were part of an investment consortium that in June participated in a $13 million funding round for Ethic.