Insights for Registered Investment Advisors: Win ESG Mandates on a Budget
By Alexander Golding, Skytop Contributor / January 10th, 2022
Alexander’s educational career started at NYU’s Stern School of Business, where he earned his baccalaureate degree in Finance. While at Stern, Alexander specialized in entrepreneurship, starting a cannabis business that did $3 million in sales. He took this knowledge on entrepreneurship to Florida Atlantic University, where he taught “Topics in Social Entrepreneurship” in the fall of 2017, where he taught undergraduate students how to prepare a business plan for a social enterprise.
Professionally, Alexander is the founder and CEO of Helped Hope LLC, a conference production firm that specializes in impact investing for institutional investors. As a convenor, he attracted over $100 billion in AUM to the ‘Transformation2030’ event series held in New York City and San Francisco. Helped Hope LLC also boasts a well-managed contact list of over 7,000 members, from corporate sponsors, to speakers, and audience members. Tech industry standouts such as Andrew Yang, Brittany Kaiser, and Adam Draper all keynoted at his events.
Following ‘Transformation2030’s success, Alexander originated, analyzed, and advised on over 400 direct and fund investments, accepting only 3% of proposals. After presenting in front of several different institutional CIO’s, he executed 7 deals, totaling $2,875,000, one of which will IPO in 2021.
Currently, Alexander is working on his Masters of Business Administration from The George Washington University School of Business, where he was awarded the Marvin L. Kay Fellowship in Finance.
Three Steps to Deliver Value
Over the years, several financial advisors have wondered how they can develop public market portfolios that meet today’s environmental, social, and governance (ESG) due diligence standards without the luxury of having a big budget. Fortunately, there are three steps they can take to deliver value to clients without compromising their fiduciary duty. These are: gain mastery over its core concepts, rank each investment by an ESG scorecard, and become comfortable with nuance when discussing these issues with clients.
Mastery Over Core Concepts
To master the fundamentals of ESG, the astute financial advisor must understand its history and all the various flavors. At its core, ESG is a multi-factor due diligence methodology that sprung out of religious and later political values.
It ranks companies based on their environmental footprint, impact on human stakeholders, and board level governance policies and procedures. It also incorporates a firm’s progress in each of these areas over time. Similar frameworks are the United Nations Sustainable Development Goals (SDGs), which is a list of 17 topic areas and approximately 169 sub-targets. Countries can use SDGs and their sub-targets to gauge their policies and to make funding choices based on socially responsible investing (SRI).
SRI is a framework for weighting sectors in one’s portfolio based originally on religious values and corporate social responsibility. This evaluation framework is used by large companies to measure their internal progress on environmental, human resources, and governance issues.
A full exposé on ESG’s background can be found in this Skytop article.
Once the advisor can speak fluently about ESG, it would behoove him or her to decide on a standardized format for analyzing consistent ESG metrics across his or her client’s portfolio.
This can be customized to the nth degree, but requires a minimum of creating one for each industry, as each sector has unique drivers and risk factors. For instance, tech companies don’t extract oil but their server farms do consume large quantities of electricity.
The Importance of Scorecard Ranking and Benchmarking
Reducing their electrical draw would be good not only for the environment, but also their bottom line. Efficiency initiatives on this point would propel a firm higher up on a scorecard, measuring how its performance benchmarks against peers companies –its competitors.
Companies are also ranked over time, so a company that stubbornly refuses to reduce its greenhouse gas emissions might be ranked lower than a company whose total emissions are higher but has been reducing the amount over a few years. While there is room for endless debate about which issues should be included, advisors generally identify three subtopics in each category (E, S, and G) and research each one in depth for every company.
This allows them to create a brief one-pager to hand to clients and provides justification for investment recommendations.
How to Nuance an ESG Go Decision
Having standardized analysis on ESG investments serves as the starting point for nuanced advisor-client discussions about the client’s values and goals. Not every person will value the same criteria.
For instance, some clients may feel that an entire industry such as the defense sector should be excluded from his or her portfolio while others feel it serves a useful purpose in society. Diving deep into these discussions will strengthen the advisor-client relationship and reveal new information that the wealth manager can incorporate into future portfolios. This is always a useful exercise, even if a client pushes back and claims that ESG risk-factor analysis does not lead to outperformance. In fact, this may be one of the best opportunities for an advisor to show off his or her preparedness by citing the statistics listed in the above linked article.
Even if the client disagrees, he or she will respect the advisor for having a data-driven thesis.
Strengthen Your Client Engagement with a Well Thought Out Approach
By mastering the fundamental concepts, creating a standardized template for analysis, and having nuanced discussions with clients, a financial advisor can provide ESG-investment services without the big budget. While it requires effort, there will be plenty of reward. As well, thought out arguments are respected by those on the receiving end. This process also allows the wealth manager to build a more complex relationship with his or her client, thus strengthening the engagement.
Who knew that so much could be had for so little upfront spending!