Practical Problems Addressing ESG in Wealth Management
Explore the challenges surrounding ESG in wealth management, including the misconceptions about ESG, the need for standardization, and strategies for mitigating measurement divergence. Learn why legacy providers may struggle to adapt and how new entrants are innovating the space. Gain insights into the importance of understanding ESG ratings and choosing the right provider for your clients.
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Presentation Transcript
10/10/2022 ADRESSING THE PRACTICAL PROBLEMS WITH ESG IN WEALTH MANAGEMENT KENDRICK WAKEMAN, CFA Advisor, First Rate Ventures Partner, qSpur Consulting
2 WHAT ESG IS NOT NOT new First fund established by Pioneer Investments in 1928 NOT a fad Retail Wealth ESG assets under management up 92% 2015-2019 1 (S&P 500 up 40%) NOT ESG Much broader than that. Includes faith-based investing, political/geopolitical investing, and many other values-based criteria.
3 ESG IS NOT FOR WEALTH MANAGEMENT Legacy providers largely service Asset Managers ESG ratings firms make most of their money selling ESG ratings to ESG managers to create ESG Funds and ETFs Legacy providers unlikely to change focus soon Would need to dramatically cut price. Would need to beef up a separate sales force. Wealth Managers have different ESG needs Standardization Clarity Customization
4 THE NEED FOR STANDARDIZATION Dispersion of ratings 2 compared to benchmark ranges from -4x to 4x
5 AVERAGE PAIRWISE CORRELATION 4 THE NEED FOR STANDARDIZATION MO 0.60 0.59 0.51 0.44 MS 0.36 0.27 0.25 0.11 RE SA SP KL ESG E S G 0.56 0.55 0.47 0.41 0.61 0.59 0.45 0.34 0.56 0.58 0.47 0.43 0.48 0.52 0.30 0.03 Correlations between ratings providers are distressingly low PAIRWISE CORRELATIONS FOR E, S, G, AND ESG 3 MO KL 0.49 0.55 0.33 0.01 MO RE 0.69 0.66 0.66 0.76 MO SA 0.71 0.68 0.58 0.54 MO SP 0.70 0.73 0.68 0.76 MS KL 0.53 0.37 0.41 0.16 MS MO 0.42 0.35 0.28 0.14 MS RE 0.38 0.23 0.27 0.07 MS SA 0.46 0.37 0.27 0.16 MS SP 0.38 0.29 0.26 0.11 RE KL (0.05) SA KL SA RE SA SP SP KL (0.01) SP RE Average ESG E S G 0.42 0.54 0.22 0.53 0.59 0.31 0.02 0.67 0.64 0.55 0.49 0.67 0.66 0.55 0.51 0.44 0.54 0.21 0.62 0.70 0.65 0.79 0.54 0.53 0.42 0.30
6 MEASUREMENT DIVERGENCE When two firms use different indicators to measure the same attribute (employee turnover vs labor litigation) THE NEED FOR STANDARDIZATION 56% Average Source of Deviation 5 SCOPE DIVERGENCE When two firms use different attributes to form their rankings (include lobbying or ignore it) 38% WEIGHTING DIVERGENCE When two firms attach different levels of importance to the same attribute (how important is % women vs pay gap?) 6%
7 THE NEED FOR STANDARDIZATION MITIGATION STRATEGIES New entrants looking to plug the gaps Many new entrants looking to address the issues of ESG specifically for wealth management. One new firm is using consensus estimates in their ratings process for smoothing (OWL ESG). 6 Dig into the differences Understand and be ready to explain the differences in ratings. Understand which ratings provider fits the best with your client. If you choose one provider, make sure you can defend the choice. Produce simple, easy to understand sales collateral
8 THE NEED FOR CUSTOMIZATION Everyone s ESG Preferences are different A trust officer s superpower is creating solutions for client problems and desires The eventual category killer will be fully integrated Importantly, it needs to be directly integrated into the portfolio construction and proposal systems. Trust Officers need mass customization Needs to be an easy process that is scalable, quick, and integrated into the trust officer s normal processes Need a method of portfolio construction Realistically, it will have to be a technology solution Can be as simple as selecting appropriate Ideally, it will be incorporated directly into the trust officer s normal portfolio creation and review software. funds in each bucket or as complicated as full portfolio optimizations. Need an easy, repeatable way to assess preferences Perhaps a questionnaire similar to risk tolerance assessment.
9 THE NEED FOR CLARITY Clients need to understand the proposal for themselves Trust took a hit in 2008, but by offering intuitive validation, trust officers can help their clients move forward with confidence. 1-100 scale is simple enough, but what does it mean? Is a 70 really 40% better than a 50? Can be useful when trying to make a case for small trade-offs. Real-world metrics are an intriguing solution One firm translates ESG into metaphor metrics such as Portfolio A kills 50,000 fewer chickens than Portfolio B (YourStake.org)7
10 Appoint an internal ESG Officer A TACTICAL PLAN Go-to internal resource for rapid response to a client request. Understand the differences between vendors Develop simple, easy to understand support collateral. Lean on marketing and content to help Content that shows you are serious, knowledgeable, and capable. Pull out the purple rack
11 REFERENCES 1. Global Sustainable Investment Alliance, 2020 Global Sustainable Investment Review (2021). http://www.gsi- alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf 2. Berg, Florian and K lbel, Julian and Rigobon, Roberto, Aggregate Confusion: The Divergence of ESG Ratings (August 15, 2019). Forthcoming Review of Finance, Available at SSRN: https://ssrn.com/abstract=3438533 or http://dx.doi.org/10.2139/ssrn.3438533 3. Ibid 4. Ibid 5. Ibid 6. https://www.owlesg.com 7. https://www.yourstake.org
