You don’t know enough about ESG to demonstrate your value

Analyst says once advisors get past the confused definitions, they’ll be able to help clients

You don’t know enough about ESG to demonstrate your value

Somewhere along the line, wires got crossed and the idea of ESG investing started to lose its meaning.

That’s the view of Judy Cotte, the CEO of ESG Global Advisors. In a preview to her upcoming presentation at WP Invest ESG, she told WP how ESG got mixed up with Socially Responsible Investing (SRI) and impact investing. She thinks that if advisors want to show their value, they should understand the different approaches and communicate them to their clients.

“Individual investors and their advisors understand traditional investing, they probably understand SRI using negative screening … but they really don't know much about ESG integration and the idea of stewardship,” Cotte told WP.

Cotte explained that ESG is NOT about excluding companies. Unlike SRI, which uses a negative-screening approach, ESG investing assesses investments from an environmental, social, and governance perspective, but a low ESG score doesn’t mean investors need to cut that firm out. Instead, they can act as “stewards” to both improve the firm’s score and limit their exposure to certain looming risks.

That approach pays dividends. Three academic metastudies shared with WP, covering all 2,250 academic assessments of ESG performance, showed that on the whole companies that manage ESG issues well are less risky and offer better share price performance over the longer term.

The “stewardship” ESG approach emerged from institutional investors looking to limit their investments’ exposure to the risks that come with climate change, social upheaval, or poor governance. Those investors picked some companies already taking the right steps, but focused a great deal of energy on advocacy, using voting power and access to steer companies away from the potential catastrophic risks that could come from exposure to a force like climate change.

That doesn’t mean advisors need to start becoming advocates, though. Cotte says the role of an advisor will be assessing what funds build ESG stewardship into their strategies.

“BlackRock is a good example of a manager that has invested enormous resources in a stewardship team,” Cotte explained. “The role of the advisor should be to really understand which asset managers are doing it well and which are not.”

The top managers, Cotte says, tend to report their stewardship practices openly. An advisor that reads those numbers can tell their client how best to invest for the long term.

She also insisted both ESG and SRI strategies have been tarred as lower-return approaches to investing. Like any fund, an SRI fund can be well managed or badly managed, an ESG-focused fund can be the same. The success or failure of those funds is down to market forces and the choices an advisor makes. In the long term, Cotte reminded WP that well-managed ESG and SRI funds should perform well. 

Cotte thinks ESG should be integrated into every advisor’s strategy, and they should proactively offer their clients SRI options. Advisors can use ESG and SRI, and their understanding of the differences between them, to demonstrate value in an era of fee compression and robo-advice.

 “ESG integration is all about value, delivering better long-term sustainable profit,” Cotte said. “Advisors should be aware that increasingly there are a number of investors who do want to align their investments with their values instead. Understanding the different types of SRI funds that are out there, how they’re screened and how well they’re managed, will be key.” 

Cotte will be sharing more of her insights into ESG investing at WP Invest ESG on March 25 in Toronto.