One of the key trends in the financial services industry has been sustainable investment growth, in both product value and asset growth over the past few years.
By Tony Davidow, CIMA
One of the key trends in the financial services industry has been sustainable investment growth, in both product value and asset growth over the past few years. Even with this rapid growth, there is still a false notion that doing well in your portfolio means you have to give up returns, and as a result, some advisers and investors have been slow to adopt sustainable strategies. Institutional investors in Europe, public funds, grants, foundations, family offices, women, and for thousands of years have led to the adoption of these mysterious schemes.
We have begun to see widespread acceptance from all segments of the customer over the past few years – but there is still a great deal of confusion between advisors and investors. Several factors have led to the confusion and slow pace of sustainable investment. Terms used to describe this method — community-based investment (SRI); environmental, social, and administrative (ESG); impact investment; and sustainable investment — perhaps a major source of confusion. The words are often used differently, but there are differences and methods for each test.
What is a Sustainable Investment?
In the 1990\’s, SRI became an easy way to express opinions about unpopular activities. Anti-apartheid investors can exclude companies doing business in South Africa from their positions. Investors can express their displeasure with cigarettes, alcohol, or games by not including “sin stocks” or by eliminating environmental companies from their clients ’portfolios. Outside of companies it often meant sacrificing profits, however, many investors shy away from investing in the public.
Over the past few years, ESG testing has become very popular in large institutions, high families, net (HNW), women, and millennials. This relative testing method offers the highest weights in companies that show the best practices. Numerous studies have shown that these strategies have historically surpassed their unlimited indicators.
Impact investments are focused on influencing change especially in the private sector. There is a growing number of private equity funds focused on impact investment. Family offices tend to invest in factors related to family planning and inheritance planning, namely, education, the arts, renewable energy, cancer research, etc.
Sustainable investment is a broad definition that includes investments that have an impact on social, environmental, social, and governance, impact on investment and grow significantly. According to a US SIF biennial report, a total of U.S. assets. Under the control of sustainable investment has grown from $ 12 trillion in 2018 to $ 17.1 trillion by 2020, an increase of 42 percent. This represents about one-third of U.S. technology assets. Under management, a dramatic increase of 25 times, or an annual growth rate of 14 percent, since 1995.
The report breaks down ongoing investment assets under management by early 2020 into consolidated funds (> $ 3 trillion), other consolidated funds ($ 865 billion), other funds ($ 716 billion), ETFs ($ 21 billion), i -variable annuity ($ 17 billion), and other investment vehicles ($ 11.5 trillion). The latter group includes UCIT and separate managed accounts.
The number of alternative sustainable investment options is growing exponentially. The US SIF 2020 style report has identified $ 716 billion in ESG assets under the control of all 905 vehicles by early 2020, representing a 22 percent increase in inventory compared to 2018, and an increase of 22 percent. 16 in the amount of money. ESG private and public funds represent the largest number of separate funds and increased by 21 percent to 681 funds. Assets under control increased by 55 percent to $ 438 billion.
If we dig into the customer base, we see that the steady investment in family offices has increased by 50 percent, from $ 4 billion to $ 6 billion, over the past two years. By 2020, the top issues in family offices were climate change, carbon emissions and clean technology. Educational institutions hold $ 378 billion in well-invested assets in early 2020 – a 19 percent increase from 2018 – focused on climate change and carbon emissions.
The largest portion of continuous investment is in public finances: about $ 3.4 trillion, or a 10 percent increase over 2018. and CalSTRS. The report identified 181 government funds in accordance with various sustainability policies, similar to 2018.
The Role of Wealth Advisors
Economic advisors should take the lead in educating investors about the benefits of sustainable investment and how these strategies can be put into place. Asset management does not increase profits, but rather ensures that the strategy offers the highest possible opportunities to achieve the client’s goals. Those objectives may include aligning the investor\’s intent with the portfolio. With millennial investors and Gen Z representing a large percentage of the workforce, and with many investors interested in sustainable investment, economic advisers need to engage investors and educate them on the appropriateness of ongoing investment options. If economists fail to tackle these problems, for thousands of years and Gen Z investors may feel compelled to find advisers with the same values and ideas.
According to a 2020 McKinsey report, the unprecedented amount of goods will pass into the hands of US women in the next three to five years, opening up a $ 30 trillion opportunity by the end of the decade. Today, women control about a third of all wealth, or $ 11 trillion in assets, and are likely to inherit more wealth as their elderly partners pass away. Women often make different investment decisions than their male counterparts. They usually avoid risks and focus on achieving health goals. Numerous studies have shown that women look at social, environmental and political issues in making decisions.
HNW investors often focus on their legacy and give back to the community. Investing in some form of sustainable investment can improve their causes. Economic advisors need to inquire about family interests and decide if this should be included in the family portfolio. Asking about these interests shows the greatness of the skills. The HNW family may not see sustainability as part of their current mentor\’s expertise and value proposition and may choose to seek counselors with expertise and the ability to educate the wider family.
Essentially a sustainable investment is not a fashion, or a niche strategy; it has become a common investment method and accepted in the customer categories. Economic advisers should use this opportunity to differentiate between their performance and value proposition – and educating investors can pay off in the long run.