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.