Financial Advisor contributor Paul Ellis recently interviewed Jeff Gitterman, co-founding partner of Gitterman Wealth Management, to discuss the motivation behind the creation of their ESG portfolios.
Ellis: Jeff, please give our readers some background on Gitterman Wealth Management (GWM).
Gitterman: The story of GMW’s development goes back to 1990 when I began focusing on college professors as a target market. The firm grew slowly until 1996 when I got a slot in the New Jersey Alternative Benefit Plan. At the time it was a $6 billion plan managed by TIAA-CREF and we got added to the plan with AETNA Financial Services as our plan sponsor for 403-B and 401-A plan options for the individual Defined Contribution (DC) plan.
Once that happened it soon became clear that I could not service 30,000 faculty members in the system, so I started hiring other advisors to grow and support that market. In 20 years, GWM has grown to 25 employees and three offices with approximately $1.5 billion under advisement, which includes our assets under management, DC plan assets and assets outside the plan, which we manage for retired faculty.
Ellis: You’ve built a very successful RIA practice in that market. What has motivated you after 20 years to create ESG (Environmental, Social and Governance) portfolios and begin directing time and resources from your RIA, including your personal commitment, to the sustainable investing market place?
Gitterman: I’ve always been focused on personal growth and development through meditation and other learning practices. Unfortunately that was separate from business growth and development, with no clear way to align the two ideologies.
As an advisor, I’ve always done what’s best for my clients, but the investment strategies I offered were solely return-on-money focused. I had not found an investment solution for the mass-affluent client that put planet first, people second and profit third.
When Morningstar launched their globe analytics system, it dawned on me that my personal creative efforts in film making and writing could be combined with a similar investment philosophy and model that allowed me to pour my passion into my wealth management business with global reach.
Ellis: So now you’re a year into the process of ESG research and portfolio modeling for your clients and beginning to offer the research to other RIAs. What’s the benefit to GWM and what has motivated you to extend this effort beyond you own RIA practice?
Gitterman: I started looking for an ESG solution in the RIA world and couldn’t find any for the mass-affluent market. There are a number of solutions out there for the high net-worth client, but we didn’t find any suite of solutions for clients with a $500k IRA. So, we began constructing our own portfolios, as well as talking to other RIAs and advisors in the Greater New York area.
Over and again we heard there were no mass-affluent models available. In addition, other advisors began asking if we could make our portfolios available to them. This was by default and not a planned business strategy.
Then a light bulb went off when I realized that GWM clients could invest about $1 billion in the SMART (Sustainability Metrics Applied to Risk Tolerance) Portfolios, but if a thousand advisors saw the opportunity for ESG integration with portfolio alpha and good risk management we could have a bigger impact on the investment world. That’s when I got excited!
Ellis: Let’s assume I’m running a successful RIA practice for 20 years, Jeff. What’s the first step in integrating ESG analysis into my client portfolios? Where can I go for effective research on metrics to include in the process?
Gitterman: We started with the Morningstar globe system, which gave us a universe of about 140 ESG funds instead of 22,000 total mutual funds. We then began our own diligence process and found other services available that scrub the funds for various metrics. Of the 140 we found less than 20 that met our combined criteria for risk management, portfolio alpha and cost efficiency.
GWM has been running asset allocation models internally for 15 years. We have oversight from Goldman Sachs, Blackrock and Fidelity on our models, which is now part of our ESG modeling process as well. We are also seeding funds from Europe to expand the screening process and improve returns. The SMART Portfolios currently invest approximately $34 million in risk-adjusted ESG mutual fund models.
Ellis: Where, in addition to U.S. markets, are ESG investment opportunities developing? You’ve mentioned working with European asset managers.
Gitterman: European nations are five to 10 years ahead of the U.S. in getting the public and private sectors to work together on issues like clean energy. European endowment and sovereign funds, as well as major investment firms see ESG integration as the right and necessary way to do business.
The portfolios we are helping to launch in the U.S. markets have great performance and better metrics screening processes than many U.S. funds. I believe it will become quickly relevant that investors can create alpha by using these metrics.
Ellis: For advisors interested in sustainable investing, whatever the motivation, how can they get the process started on trading platforms, with custodians and broker-dealers, as well as the intentional ESG asset managers?
Gitterman: We spend a lot of time on these issues. The more advisors who do this across those industry relationships, the more responsive the business partners will become.
The custodians and trading platforms are getting the ask from advisors and don’t have the solutions yet. SMART Portfolios is one solution but won’t be the right fit for everyone. Advisors can take our solution or others to trading platforms for product and pricing reviews as a starting point.
Doing the research is hard. You have to speak with every manager about their methodology and ESG analytics partners and process. An advisor who doesn’t do that runs the risk of presenting portfolios to clients that don’t meet their criteria, which makes the advisor look ignorant at best and perhaps negligent in their diligence process.
We provide SMART Portfolios advisor partners with our methodology, diligence and screening processes. Currently in some economic sectors pure ESG choices are impossible to provide, but we’re pushing for better metrics all the time.
Ellis: You’ve mentioned ongoing dialogues with asset managers. Do you provide this and other client-facing services for advisors who use your ESG research?
Gitterman: Yes, we can help you prepare effectively for client meetings and be a resource for client calls and conversations until the advisor develops a comfort level for himself or herself.
The more assets we manage in these portfolios, the more portfolios like them will come to market. The more we demonstrate that the better ESG funds are getting the assets, the more asset managers will eliminate the green washing that exists.
We can be an effective voice for advisors with the investment companies, which is part of our mission. Asset managers can’t just slap an ESG label on a fund and expect advisors to accept that at face value.
We’re trying to be clear with advisors about presenting ESG products and asset managers about providing full disclosure on the metrics being used in product construction. The sooner we can get rid of the green washing the sooner everyone will know where they stand.
Ellis: Some ESG issues are in the news almost daily. The first is the divest/invest dialogue. What are your thoughts on this.
Gitterman: The problem with divest right now is getting enough scale to have any impact on company policies related to ESG issues. Maybe one day we will achieve that scale, but right now most of us use fossil fuels as consumers, for example, even if we’re not investing in those companies. What’s important now is to be conscious of how we’re using fossil fuels and to pressure companies related to product efficiencies, environmental and social impact.
When the New York State Common Retirement Fund asks for due diligence on Marathon Oil’s treatment of indigenous populations in South Dakota related to pipeline construction, they get a seat at the table because they own a lot of shares.
In smaller markets and with smaller companies you can use divest more effectively, but these decisions are client driven. We can meet a client’s needs either way through proxy access and other engagement strategies. Right now we need both approaches to be most effective.
Ellis: What you’re talking about is knowing your client and having a values-focused relationship with them that allows for discussion on these kinds of issues.
What about thematic ESG issues like gender equality, access to clean water and using recyclable materials for built infrastructure. Do your portfolios focus on thematic investment issues in support of client priorities?
Gitterman: Definitely, and we believe thematic investing will grow as a segment of ESG investing. There are major issues at global scale that can be engaged by investing in companies that are providing solutions. This is an area where individual and institutional investors are asking for strategies when it’s clear that government response at the federal, state or local level is inadequate.
Ellis: Anything else you would like to say to advisors about the opportunities in ESG investing?
Gitterman: The Global Sustainable Investment Alliance (GSIA) recently reported that at the start of 2016, global sustainable investment reached $22.89 trillion, a 25 percent increase since 2014. If investors can do well by doing good, who would say no to that kind of opportunity?
Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.