Private bankers are not leading their clients towards value-based investing

Environmental, social and governance (ESG) and impact investing have become the buzz words for the “modern” way of managing assets.

ESG investments cover liquid assets while impact investing deals with illiquid assets. There are those who see these as an extension of philanthropy, or a way of integrating philanthropic interests with investments. I prefer to look at it as a way of managing money in a formalised manner – integrating sustainability in the way all assets are managed, thus taking into account all risks: social, financial, environmental, governance, human rights, and others. Smart investing.

When engaging with financial advisors, I often hear this comment: “Robert, this is interesting, but can you please send me research which shows no negative impact on returns in the worst case (scenario)? And in the best case, there is an outperformance?” They are clearly reluctant to expose their clients to ESG or impact investing.

To help enlighten these financial advisors, I do send all the research I had because there was a lot of material to chew on. Then it finally dawned on me that this was less a matter of proof but rather belief. How much research was done on collateralised debt obligations (CDOs) before people moved all their assets into that toxic mess? The answer is none. Even after being confronted with the financial meltdown caused by CDOs, advisors still wanted more proof to be convinced when it comes to ESG and impact investing.

They would say, “We need liquid, mainstream, large scale, profitable, understandable products that institutional investors can understand.” In turn, I would reply “Oh, you mean…” and highlight the following: sovereign debt; a stock market that didn’t perform for 10 years and had massive volatility; and subprime collateralized debt obligations. These asset classes all performed miserably while one brought about the financial crisis.

When advisors keep repeating this mantra it becomes comical. The biggest laugh I had was when I was told ESG and impact investing are too risky. This comment came from the mainstream financial sector, which paid out $260 billion in legal fees and fines doing the “non-risky stuff” that they were carrying out prior to and after the meltdown.

So why then is every single major wealth manager paying attention to ESG and impact investing now? Because both consider all the risks: an increase in costly financial issues such as carbon, future low carbon investment are extremely large in illiquid assets with low volatility, performance across the industry has been acceptable, and most importantly, because impact investing is not correlated.

Then there’s this scenario. I had a recent conversation with a private banker who manages wealth portfolios. She lamented on the difficulty of getting her high net worth clients interested in impact investing. Having heard this so often, I had to be blunt with her on it’s not working for her. “The reason you can’t seem to convince your client about ESG or impact investing is because you are not good at getting buy in.”

Private bankers seem to live in fear of their clients. They don’t lead their clients but follow them. How can you engage with your clients if you are afraid of them, afraid of them leaving, or if you don’t understand values-based investing? If you have limited information then it will definitely be hard to engage clients on impact investing in a way that would provide a sense of fulfilment for them.

Client engagement

Asset owners who meet with their wealth managers are often confronted with the comment “Sorry your portfolio is down because interest rates are so low.” That conversation is dead. It is not inspiring, joyful, or interesting. The liquid part of the portfolio often represents 80-90% of the portfolio. So hearing that 80-90% of your portfolio is down because of low interest rates won’t put a spring in your step.

The part that represents a very small percentage of the portfolio, alternative investments or illiquid investments, is the part where wealth managers can really engage, particularly the part called impact investment.

If you look at the 10-20% of a client’s portfolio, you might find a razor thin section that could be considered “impact investing” within that. It is that tiny part of the portfolio that wealth managers can really engage in with the client and get clients passionate and excited about. Most of all, it provides that feeling that a wealth manager made a client’s day. Isn’t that something to aspire for? How about waking up, smelling the roses, engaging with your client to gain fulfilment, and earning your bonus in return?

Robert Rubinstein has been an integral thought leader for the Triple Bottom Line Investment Industry for many years. His mission, spearheaded by the TBLI Group, is to create an inclusive values based economy. The aim is to maximise investment flows into sustainability initiatives by showing the opportunities triple bottom line investing offers to investors.