Picking High-Conviction ESG Investment Managers
Financial advisors can draw on their expertise to identify well-governed and impactful ETFs that are strategically enabling the transition toward a more sustainable economy through investment. By leveraging a robust, multi-pronged due diligence approach, advisors can find high-conviction managers that systematically and meaningfully integrate ESG strategies throughout their investment processes.
At Envestnet, we believe this due diligence framework should include four main criteria:
• ESG Governance & Policies at the Firm: Does the manager of a prospective ETF investment have a dedicated ESG oversight function? Does the firm have a viable track record on sustainable investing, and how has its approach evolved over time? Along with these questions, advisors and investors should review managers’ overarching philosophy on sustainable investing, and how they measure success and progress over time.
• ESG Integration within the Investment Process: Advisors should check to see in which parts of the investment process managers have incorporated ESG insights, such as asset allocation, portfolio selection, risk management, and security selection. (Ideally, a manager should have incorporated ESG criteria into most or all of these.) It is also a good practice to look into how the weighting of ESG factors affects investment decisions. And, to be safe, look into what ESG data and research is leveraged during investment decision-making, and how often the investment process ESG factors are reviewed. If exclusionary screens are utilized, ask about the rationale for selecting them, and what thresholds companies must meet to be flagged.
• Impact Reporting: Ideally, an investment manager should report on the environmental and social outcomes of their portfolio(s) on a regular basis. If they do, then advisors should check to see that the impact metrics in the reports are relevant to the strategy.
• ESG Engagement: It helps if ESG-focused asset managers engage with the companies they invest in, since doing so enables them to make better investment decisions. Ask if firms have a specific framework for engaging on ESG issues, and see if ESG engagement activities are overseen and monitored internally, or outsourced to a third party. Check if a manager advocates for more meaningful disclosure, and transparency, related to company ESG information.
Keep Investors Focused
As the Russian war against Ukraine, and the heroic Ukrainian resistance, near their three-month anniversary, speculation about how far Putin may go to achieve his aims, and additional geopolitical fallout from this crisis, can lead to frightening thoughts. During periods of geopolitical volatility, financial advisors can demonstrate significant value for investors by acting as financial coaches who can prevent them from allowing their emotions to drive rash investment decisions.
Advisors can talk investors down when they are afraid, and remind them that the U.S. equity markets and overall economy have proven to be resilient in the face of geopolitical shocks. Following the Russian invasion and annexation of Crimea in 2014, the Iraqi invasion of Kuwait in 1990, the Iranian Revolution and subsequent Iran-Iraq War, and even the 9/11 attacks, the S&P 500 declined by only about 10 percent on average, according to Goldman Sachs.
No one knows when the fighting in Ukraine will end. But advisors can offer expert guidance and insights to help investors not only navigate the resultant market volatility, but put their money to use to help facilitate a more sustainable U.S. economy and energy supply—which would put an end to Russian economic leverage over the West.
Dana D’Auria is co-chief investment officer of Envestnet Inc. (NYSE: ENV).