Wealth managers and financial advisors have an opportunity to take advantage of the environmental, social and governance (ESG) investing megatrend and the momentum of values-based investing. However, a recent Cerulli Associates report seems to suggest that simple inertia may be holding back RIAs. While the reasons may vary, those poised to offer ESG options and opportunities for their clients may look to their portfolio models and investment management platforms to help drive a disciplined approach and make rebalancing and trading simpler and more efficient.
The next generation of investors, including those who will receive the largest wealth transfer in history in the coming years, share similar investing priorities as the wealthy. Advisors who are in a position to offer sustainable investment opportunities will be better equipped to attract new clients, retain existing ones, and keep pace with a changing investor landscape.
How Important Is ESG to Investors – and Your Firm?
Some experts say ESG investments are no longer a niche. ESG assets are on track to exceed $53 trillion by 2025, based on Bloomberg analysis, up from $37.8 trillion expected by the end of 2021. In terms of retail demand, $1.65 trillion in sustainable assets were held by U.S. mutual fund and ETF assets as of year-end 2020 – 67% more than the total at year-end 2019, according to Morningstar. New ESG bond issuance is already at $577 billion this year, $100 billion more than in all of 2020.
Among 31 global wealth managers surveyed by Aite Group last year, 44% reported an increase in client demand for ESG assets, led by U.S. and Canadian wealth managers. Yet, an estimated 30,000 registered firms managing $5.7 trillion based on a strict fiduciary standard have yet to adjust to a macro-shift in investing, according to a Cerulli Associates report released in April.
With Millennials expected to inherit more than $68 trillion in wealth from their boomer parents during the next decade, according to consumer researcher J.D. Power’s 2021 Full-Service Investor Satisfaction Study, a potential disconnect with Next Gen investors could hurt firms’ growth prospects as advisors may be increasingly judged through the lens of sustainability.
Rebalancing in an ESG World
Starting with a client’s investment policy statement (IPS), risk profiles and preferences, deciding on the portfolio model structure and asset allocations could be as simple as applying security restrictions and ESG preferences in the model. A rebalancing platform’s model management capabilities are key to making the process faster and easier.
For example, RedBlack allows for the creation and customization of ESG sleeves or sleeve sets in multi-tier models, providing the option to invest with ESG consideration within the 60/40 model. Our node rebalancing represents different levels of multi-tier models, allowing you to rebalance different layers or variations of your model at a time, and target any combination of nodes within a multi-tier model to rebalance that portion of the portfolio via actions and parameters.
A Disciplined ESG Model Approach
Values-based investing is experiencing a paradigm shift as interest in ESG investing continues to increase, reaching farther and wider than the original social responsibility premise of endowments and foundations. ESG-aware wealth managers and financial advisors will be best served by taking a sophisticated, disciplined approach. By integrating customized ESG themes into models using an advanced rebalancing and trading platform, advisors can shift seamlessly to fully satisfy their clients’ ESG preferences and requirements.