Is ESG (environmental, social and governance) the future of investing?
Fidelity Investments thinks so, which is why it announced today it forged a relationship with asset manager Ethic Inc. to enable financial advisors working with Fidelity to create personalized, ESG-focused separately managed accounts for clients.
Based in New York City, Ethic is a registered investment advisor specializing in building and managing sustainable investing-oriented equity portfolios that align with an investor’s value system and investment goals.
The company uses two models to create its portfolios. One model gathers raw company data from numerous sources and analyzes it for ESG risks and opportunities. The other model employs Barra Inc.’s portfolio risk and performance analytics to minimize tracking error relative to an underlying benchmark.
Fidelity is a financial backer of Ethic—this summer it participated in a $13 million funding round for the four-year-old company. Fidelity is now expanding that relationship by bringing Ethic’s capabilities to its advisor clients.
“We’re seeing a lot of demand from advisors [for ESG investing] and advisors are seeing demand from investors,” says Bob Litle, senior vice president at Fidelity Institutional Asset Management. “We also think there’s latent demand from investors. The reason we became so interested in working with Ethic is their ability to help advisors bridge that and introduce a conversation about values and investing that a lot of advisors aren’t confident having today.”
Litle says facilitating ESG investing is a practice management tool to help advisors connect with the next generation of investors, a cohort that’s expected to drive future engagement in the sphere of ESG investing.
He says Fidelity will match Ethic with advisors who have an interest in ESG investing and could benefit from Ethic’s services.
Ethic offers two types of SMAs: one version uses existing ESG models built around certain themes; the other creates a custom allocation using direct indexing, which seeks to replicate the performance of an index by buying the underlying securities instead of an exchange-traded fund or mutual fund.
“We work collaboratively with advisors to build something that’s unique and personalized to the firm itself,” says Ethic co-founder Jay Lipman. “It’s not necessarily related to the funds, but to the strategy or solution that is based around the story they want to tell in a way that resonates with their own firm and the clients they serve.”
According to Ethic’s Form ADV, the company charges an annual portfolio management fee of 0.50%, though the document notes the fee is generally negotiable. Lipman says his company’s typical fee schedule is around 30 to 35 basis points.
Litle says Fidelity will earn a portion of the investment management fee that Ethic earns from its relationships with Fidelity’s advisor clients.
Talk Vs. Action
Much has been made about the growing interest in ESG and/or sustainable investing principles among both retail and institutional investors. In Fidelity’s press release announcing its collaboration with Ethic, it quotes Morningstar data showing that ESG funds garnered assets of $8.9 billion in this year’s first half versus $5.5 billion for all of last year.
Even so, ESG-related assets remain a tiny fraction of the overall assets in ETFs and mutual funds, creating the impression that ESG investing is more hype than substance.
“In the U.S., there’s this undercurrent or narrative that ESG has been more talk than action," Litle says. “Even though the amount of assets is growing, there’s a lot of evidence that there’s more expressed interest than dollars going into ESG.”
He posits that part of the issue is ESG investing is being offered with pre-packaged solutions that investors don’t necessarily want.
“One thing that’s interesting about Ethic is their ability to customize and personalize [portfolios], so people with different values can get portfolios reflecting those values,” Litle says.
As for Ethic, the firm had a productive summer. Along with the aforementioned $13 million fundraising, in July the company was added to Dynasty Financial Partners’ turnkey asset management platform.
Lipman notes that Ethic’s sweet spot is larger independent RIAs, family offices and multi-family offices.
“It’s primarily growth-centric firms seeking to differentiate their offerings and wanting to engage with their clients more effectively to appeal to the next generation of wealth in order to positions themselves for the future,” he says.