The COP26 conference in Glasgow may be over, but the themes discussed there will continue to be topics of concern for people, especially in the context of long-term investments in company stocks and mutual funds. There are so many issues to be considered: the environmental, particularly the response to climate change; the social, how companies treat their employees, suppliers and customers; and governance, how companies manage themselves as responsible corporate entities. With all of these facets of ESG, the subject of sustainability can feel overwhelming, but it doesn’t have to be. With the right tools, financial advisors can help their customers easily understand the complexity of the sustainability issues and take action based on that knowledge.
ESG: Once a nice to have, now a need to have
Many customers are concerned about the environment and wish to purchase from and invest in companies that share their values: reducing emissions, eliminating or recycling waste in supply chains, and reducing the carbon footprint of businesses. Three critical investor groups care deeply about ESG: women, millennials, and high net worth individuals.
What is more, companies that are climate-aware tend to outperform their peer group, according to asset management and academic studies. Companies ranked by Thomson Reuters, Sustainalytics and MSCI ESG have all out-performed all equally-weighted S&P500 since 2015.
Why? Companies that actively measure and manage how they are performing on ESG metrics have higher growth, lower operational risk and lower systemic risk. So ESG-readiness makes companies attractive for those of us concerned about climate change but it also makes them more profitable and desirable as investment opportunities. With OutRank, we can overlay an ESG perspective on top of our existing picture of our portfolio’s mix of performance, risk management and durability.
A top-down approach to ESG
Some investors are interested to know the big picture and how climate change may affect macro variables such as GDP. With OutRank, you can look at different scenarios including baseline, climate stress or specific parameters required by certain countries. In our experience, a simulation-based approach can help the financial advisors and wealth managers evaluate investment performance differences in future climate-related outcomes. You can use OutRank to consider thousands of economic scenarios in seconds to visualize and demystify what climate change means for economic growth by region and by the possible outcomes of mitigation measures.
A bottoms-up approach to ESG
In this case, a financial advisor can look at data across a universe of companies or mutual funds to assess how they stack up against competitors with respect to ESG. There is a plethora of internal (company) and external (industry, government, regulatory, legal) data available from which rankings and scores are created. For OutRank, we use data from Refinitiv to allow users to calculate a portfolio’s aggregate exposure to ESG factors. Whether companies and funds are involved with carbon-intensive activity that they are actively trying to mitigate, or they are carbon-neutral from an operational perspective but are trying to improve the ESG ranking of supply chain partners – these are all characteristics that can be measured and evaluated.
Towards Purpose-Driven Investing
Investing in responsible companies and funds is one way that people can create an investing strategy that is truly unique and purpose-driven. For example, financial planners can look at traditional fossil-fuel companies and select those that are committed to reducing emissions and investing in alternative energy sources. They can invest in new, green technology firms, which, while untested, may yield dramatic improvements in some traditional sectors, such as lead battery recycling, and new sectors, such as electric batteries for electric vehicles.
Old industries such as shipping and new industries such as BioTech both use elements of ESG data analytics to combat climate change.
With OutRank, we make it easy for advisors to show how including ESG metrics into their portfolio construction process helps customers achieve their investment objectives. Engaging with customers on ESG matters will help keep them informed and involved with their investment choices.
For example, a customer may wish to sell her stocks in fossil fuels, however, OutRank would help you look at the risks and benefits of such a decision. You could have a conversation with your customer about balancing her holdings in an oil company with a new investment in a renewable energy firm.
ESG: Driving customer engagement
Including ESG among the non-financial factors in investment decision-making helps advisers communicate with customers in a more meaningful way. Providing an up-to-date and reliable view of the ESG factors and sustainability impact on your customers’ financial situation will help you to tailor your customer loyalty communications to this segment.
For example, if the topic of home heating prices is in the news, publish an article reminding customers that this is a good time to review their current energy supplier as well as consider investing in alternative energy companies. You can use OutRank to calculate a number of economic scenarios and demystify what rising energy prices mean for cost-of-living standards.
For any asset class, you can develop an article, video or podcast encouraging people to look at increasing their allocation to sustainable companies. For example, a customer might be concerned about waste in the fashion industry. You could provide research into clothing companies that are committed to using organic or recycled materials in their manufacturing process, and OutRank could make this process easy.
Optimism and Actions
Bringing simplicity to complexity is the top priority when adding ESG factors to the investment mix. Sustainability is not the province of engineers, scientists and regulators; it’s for everyone. Engaging with customers can be intuitive and investor-friendly, making ESG accessible to all. With OutRank, we keep it simple, transparent and dynamic, helping customers achieve a seamless customer experience across their lines of business. Most importantly, we help investors feel optimistic and empowered. Despite the serious risks posed by climate change, their actions can contribute to positive change, by investing in growing, innovative companies that are stepping up to meet these challenges.
To learn more about how Kidbrooke can help you integrate ESG metrics into your investing planning, please get in touch.