WEALTH MANAGEMENT EVOLVED
Posted on: December 2nd, 2019

Crain’s Chicago Business

Roundtable on Wealth Management

Environmental, Social and Governance (ESG) Investing

(L-R): Joseph Feldmann, Dan Lockwood and Eric Maddix

ABOUT THE PANELISTS

Joseph Feldmann, CPA, CFP®
Director of Investments
Private Vista LLC
630-455-0600

JOSEPH FELDMANN, CPA, CFP®, is director of investments for Private Vista, which he joined in 2016 when it merged with his former employer, WNA Wealth Advisors. He began his career in corporate accounting, later working in corporate financial analysis, personal financial planning and investment counseling. Today, he focuses on investment analysis and strategy, helping the firm’s financial advisors identify the investment vehicles and portfolio strategy they need to generate outcomes that fulfill client goals. He holds a bachelor’s degree in accounting from DePaul University.


Dan Lockwood, CFP®, CMFC®
First Vice President – Wealth Management
Raymond James & Associates, Inc.
312-869-6116

DAN LOCKWOOD, CFP®, CMFC®is a first vice president – wealth management for Raymond James & Associates. His team advises individuals, corporate executives, multigenerational families and business owners on financial planning, investing, philanthropy, gifting, and tax and estate planning, along with banking and lending needs. Previously, he was a financial advisor, manager, and vice president with Ameriprise Financial. He holds a bachelor’s degree in management from Gettysburg College, and is a member of the Greater North Shore Estate and Financial Planning Council and The Financial Planning Association.


Eric Maddix
Partner
Chicago Capital, LLC
312-429-2334

ERIC MADDIX is a partner with Chicago Capital, which he joined in 2018 after working in the investment business since 1987. He previously held portfolio management and research roles with William Blair and Stein Roe & Farnham, where he co-managed the Stein Roe Capital Opportunities mutual fund. He is a member of the Springboard Foundation, a nonprofit primarily supporting afterschool education programs in Chicago. He holds a bachelor’s degree in business from Iowa State University and an MBA from University of Chicago Booth School of Business.

Environmental, social and governance (ESG) investing has skyrocketed in popularity among investors looking to extend their personal values and priorities to their investments. Assets being managed under ESG criteria are currently estimated to exceed $20 trillion, comprising about a quarter of all professionally managed assets worldwide.

Three local wealth managers shared their ESG insights with Crain’s Content Studio, including how individuals can “do good” with their investments, and the impact ESG investing is having on public companies and shareholders.

 

What’s driving the growing interest in ESG investing?

Dan Lockwood: Education and data. When someone hears ESG they think socially responsible, which is based on ethical and moral criteria. ESG builds off of this, but makes the assumption that environmental, social and governance factors have financial relevance. ESG information about a corporation is paramount to understand its purpose, strategies and management quality. The data and research have come a long way since Ivo Knoepfel wrote “Who Cares Wins” in 2005, a report that laid the foundations of ESG investing. Now 80 percent of the world’s largest companies use the Global Reporting Initiative standards, the first global standards for sustainability reporting.

Eric Maddix: There’s a growing recognition that business is about more than simply turning a profit. Successful businesses must be very focused and committed to their customers, workforce and owners. In today’s marketplace, priorities have broadened to include many aspects of corporate citizenship, including how firms approach environmental, social, governance and other issues.

Joseph Feldmann: There’s increasing concerns over climate change. Also, the growing awareness of inequalities in America with regard to income, gender and race. The mutual fund industry has noticed inflows into ESG funds relative to other offerings, and has greatly stepped up marketing toward the socially conscious investor. Perhaps this has created a feedback loop, as more investors read about ESG through marketing efforts, causing more inflows. As more inflows occur, more investment products are introduced. More products produce more marketing, and the loop continues. Companies are doing their part by making sure that anything they do that’s even remotely positive towards social concerns is advertised to generate goodwill. For example, oil companies now advertise how they’re creating a lower carbon future. In response, consumers are proving with each bite of their plant-based burger that social consciousness sells.

How does ESG investing compare to socially responsible investing and impact investing?

Feldmann: Socially responsible investing, or SRI, is generally an exclusionary process. For example, companies involved with certain products, such as guns or alcohol, may be excluded from a portfolio. Although an investor may feel better when certain companies are excluded, it’s debatable whether this approach is effective in creating societal change. Impact investing is an inclusionary process, where, for example, companies involved with wind farming may be intentionally purchased. The disadvantage is that a diversified portfolio can’t be created solely through impact investing. In contrast, ESG investing is not necessarily exclusionary or inclusionary. Often, it involves engaging with management to bring about the desired change, which may often be incremental rather than transformational. For example, an ESG fund might purchase the stock of an oil company and then engage with management to help reduce oil spills or improve board diversity. Unlike impact investing, a diversified portfolio can be achieved through ESG investing.

Lockwood: People frequently confuse ESG investing with impact investing and SRI, both of which have been around since the 1970s. SRI used to be the standard method of investing sustainably, while impact investing was done primarily through individual investments in companies that have an environmental or social impact. ESG investing, on the other hand, uses a comparative methodology where one can look at any company and compare how they rank relative to their peers in ESG principles. The investor still has the ability to diversify into most sectors of the financial markets, but can decide to only invest in “best in class” companies as determined by peer ranking. The main advantage of ESG investing is that we’re making investment decisions using fundamental and technical analysis while also reviewing the exposures to and management of ESG risks and opportunities, as well as limiting involvement in controversial business practices.

Maddix: ESG has expanded socially responsible investing to include environmental and governance issues. In many ways, SRI and impact investing were early versions of ESG investing. While impact investing and SRI may have been more focused on specific issues, ESG investing has broadened the discussion and become more accessible for most investors. We believe company managers will continue to evolve to meet the needs of the marketplace and investors will continue to have an impact by focusing on corporate culture. By focusing on personal values, financial advisers can help each client align their investments with their priorities.

What’s the most common question you’re hearing about ESG investing?

Maddix: Clients often ask, “How can I make a difference?” We believe investments should be customized to fit the investor, not the other way around. Our advice to clients is to act on issues that are important to them and choose an advisor who will support those interests through investing.

Lockwood: The most frequent question from clients is, “Am I giving up returns by moving toward an ESG style of investing?” This question was really hard to answer 10 years ago for two reasons. First, there were no industry standards for ESG review, and second, there wasn’t enough historical performance data to support an answer. I believe there’s room for growth on ESG standardization, by determining if environmental, social and governmental aspects are all of equal importance. Today, the data is available—Harvard Business School, Stanford and Oxford have all released studies showing that high-sustainability firms outperform low-sustainability firms in terms of stock market performance.

Feldmann: We hear that same concern about returns. Our expectation is that our ESG portfolios will have roughly similar performance to portfolios without that mandate. The relative performance of our portfolios is determined more by our allocations to specific asset classes than to individual companies within those asset classes. Our investment team proactively manages asset class exposure using a forward-looking approach. This is applied equally to all portfolios.

What’s the biggest misconception about ESG investing?

Feldmann: The No. 1 misconception is the idea that it simply involves excluding companies. For example, many people are surprised to find out that an ESG portfolio may hold oil company stocks, but ESG investors realize that it may be necessary to own a company in order to engage with management to create meaningful change. Ownership allows for proxy voting and discussions with management that otherwise would not occur. Regardless of the company or industry, there are many ESG factors where company management and ESG goals may be aligned. Although an oil company might not be open to abandoning the drilling of oil, the company may be interested in making drilling safer or cleaner.

Lockwood: A common misconception is that ESG investing is only for environmentalists. We believe it can be important to individuals who care about the environment, as well as to a variety of individuals who want to align their investments with their values. One of the areas many investors feel strongly about is the social component—the S in ESG—which deals with things such as workplace safety, gender equality and other labor standards. These factors are important to the individuals we service, many of whom are women, and also important personally to me as a father to an 8-year-old daughter. We place a high importance on investing in companies that are working to solve gender inequality issues or have solid equality practices because we have a vested interest.

Maddix: We believe there’s no single definition of ESG investing, nor static definition of success. ESG investing should be defined by each individual investor and reflect issues that are important to them. As investor preferences change, their view of ESG investments will likely evolve. We don’t believe one-size-fits-all. As an example, privacy concerns have become more prominent with many clients, due to the advent of social media—while other clients may be more focused on inclusion, the environment or other priorities. Our job is to help each client achieve what’s important to them.

Please give a few examples of investments that most people might not think of as being in an ESG portfolio.

Maddix: Kornit Digital is an international digital printing company that uses bio-degradable, water-soluble ink. Digital printing enables on-demand production, resulting in less waste compared to traditional, long-production runs. Another example is home improvement retailer Lowe’s, which has been setting and beating goals for carbon footprint, energy efficiency and product sustainability.

Lockwood: We are able to selectively invest in high-quality individual bonds, green bonds, bond funds and other fixed income instruments that align with ESG principles. Examples of other fixed income instruments are treasuries, certain municipal bonds, high-quality corporate and high-quality actively managed bond funds. Our ability to access such a wide variety of fixed income investments really helps with our ability to serve high-net-worth and ultra-high-net-worth clients.

How is ESG investing changing how public companies are operating?

Maddix: Investor preferences are shaped over time, just as consumer preferences shift. Successful public companies are addressing the changing interests of stakeholders. Recent corporate trends have included local sourcing, self-service, environmental impact and inclusion. Companies that take the lead on important issues should continue to thrive.

Feldmann: Public companies are coming to realize that ESG investors are shedding light on some corporate practices that need to change, and that management knows should be changed, but still needs more work and attention. For example, ESG investing has caused public companies to increase disclosure with regard to environmental issues such as greenhouse gas emissions. Increased disclosure results in increased attention toward these issues from company management. ESG investors have also been promoting disclosure with regards to social concerns such as corporate political contributions and equal pay for equal work. In terms of corporate governance, ESG investing is driving improvement in the gender diversity of corporate boards of directors. ESG investors have been questioning companies with regards to excessive executive pay policies. Overseas, corruption and bribery are important governance issues, particularly in the emerging market countries; ESG investors have been shedding light on this problem.

Lockwood: I believe the statement released in August by the Business Roundtable—a nonprofit composed of CEOs of U.S. companies—demonstrates how companies are trying to change the way they operate. Their statement noted that businesses are shifting away from the idea that the main purpose of a corporation is maximizing shareholder value. The new, broader focus takes into account all of its stakeholders, which includes employees, suppliers and society as a whole. When 181 of the 188 CEOs signed the statement, they demonstrated that ESG issues are becoming influential to the way in which businesses are run.

What types of investors are most suited to ESG portfolios?

Feldmann: ESG is most suited for investors who want to make the world a better place and also want to own a diversified portfolio. These investors understand that to change the behavior of a company, it helps to own the stocks or bonds of that company in order to have a voice. They know that excluding a company from a portfolio is not always the best solution. It’s suitable for investors who want to commit a large part or their entire portfolio to that endeavor. These investors are looking to change the world, but pragmatically believe that incremental positive change is also worthwhile.

Lockwood: We believe individuals who have a desire to invest alongside their personal values can utilize ESG principles into their pool of investments. We’re seeing a growing interest in ESG investing from our high-net-worth and ultra-high-net-worth clients. More and more trusts, estates, foundations and endowments are looking to invest in a manner consistent with their mission statements and or investment policy statement.

Maddix: We believe all investors should be comfortable with their investments, and feel strongly that investment portfolios should be constructed to fit the investor, not the other way around. Some of our clients have investments in companies that are meaningful to them, such as companies that reflect their values or have a connection to family, friends or community, while others avoid investments that conflict with their values.

How do you recommend investors begin adding an ESG component to their portfolios?

Maddix: The best way to begin is by having an open conversation with your financial advisor about your values and the types of companies you want to support.

Lockwood: If an individual has an interest in ESG investing, we suggest allocating a portion of their assets to ESG and reviewing the portfolio annually for potential additional implementation. During the review, clients can compare returns and make decisions to increase or decrease allocations as time goes on. This can be a simple and effective way to start with ESG investing.

What draws you personally to ESG investing?

Lockwood: My interest in ESG investing started out more with an exclusionary investment process initiated by both my personal experiences and from our clients who had very specific types of companies they wanted screened from their portfolios. Now, as ESG investing evolves, companies with low sustainability scores can be ruled out for inclusion in client portfolios and to help support those looking to invest their dollars according to their faith and values.

Feldmann: I’ve had the opportunity to interview many money managers over a period of decades. In the past, ESG issues weren’t a part of those conversations. In conversations today, however, I’m hearing anecdotal stories of real change occurring within companies as a result of efforts made by money managers engaging with management over ESG issues. Those success stories from money managers are what draws me now to ESG investing.

Maddix: Having had serious health issues in my immediate family, I have a personal interest in the healthcare industry and companies making responsible choices to take care of our elder population. We invite our clients to share what’s meaningful to them, then our team makes every effort to reflect those values in the investments we make on their behalf. When our clients can invest in companies that reflect their values, and continue to grow their assets, everyone wins.

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Some investments mentioned may not be suitable for all investors. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss.

 

Source: https://www.chicagobusiness.com/crains-custom-media/roundtable-wealth-management

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