Managing wealth – sustainably

Channels: IMPACT, Investment

Companies: Ceres

People: Dazzle Bhujwala

The solution to many of the challenges in the wealth management industry can be found in sustainable investing, says Dazzle Bhujwala

During the decade since the 2008 financial crisis, the US economy witnessed a steady growth and the S&P500 now hovers around an all-time high.

With that growth and easy liquidity in markets, it is worth asking: Are US wealth management firms once again losing sight of risks piling up in investor portfolios – this time the risks of climate change?

The recent PG&E filing for Chapter 11 bankruptcy protection may be the first corporate bankruptcy linked to climate change, but it likely will not be the last. If the investment community does not strengthen environmental, social and governance (ESG) related risk analysis and make investment choices that have positive ecological and societal impacts – also referred to as sustainable investing – we'll see more corporations fail.

Sustainable investing has gone mainstream, according to a recent report from Morgan Stanley and Bloomberg.

However, few leading US wealth management firms have made progress on engaging their customers on sustainable investing. A recent survey by UBS Group assessed interest in sustainable investing globally among high net-worth investors. It found that only 12% of US's wealthy investors have aligned their investments with ESG issues, compared with 39% of wealthy investors globally.

Not surprisingly, the survey also revealed that nine out of the 10 investors cite their advisor's impact on their decision to invest sustainably.

In an age of complex and new regulations, robo-advisors and massive wealth transfer across generations, adding the element of 'impact' to client investments has the potential to be a game changer.

This clearly signifies that wealth advisors have tremendous influence on how the wealthy invest. Considering that the collective assets-under-management of 10 leading wealth management firms in the US is over $6 trillion, a significant portion of the assets owned by the US wealthiest investors remains exposed to ESG risk.

It is time wealth managers learn from the lessons of the 2008 crisis and act before the problem gets too large to handle.

Firms that care to understand customers' values and aspirations and integrate sustainable investing into their advisory process by moving away from the 'one size fits all' approach will strengthen and retain client relationships.

In an age of complex and new regulations, robo-advisors and massive wealth transfer across generations, adding the element of 'impact' to client investments has the potential to be a game changer.

The trends and challenges mentioned below are shaping the future of the wealth management industry and must compel wealth management firms to seriously consider adopting a stronger sustainability focus:

  • Wealth transfer: An estimated $30 trillion in wealth will change hands over the next 30 to 40 years, according to a study by Morgan Stanley. Most of this will be inherited by millennials and women, who statistically are more environmentally conscious and want to align their investments with their values. Firms that fail to gain loyalty across generations will run the risk of losing assets rapidly.
  • Shrinking margins: An increasing number of investors only want to compensate for investment performance or prefer passive investments. Passive investments often mean 70% less fee revenue. Under such circumstances, the best way to command a premium may be to add a third dimension – impact– which goes beyond the traditional risk/return approach.
  • Robot advisors: With digital advancement, there has been a rise in robo-advisors, which managed $300 billion in assets in 2017, compared to no assets in 2012. Human advisors can add value over robo-advisors by offering a deeper understanding of their clients' values and the impact they would like to create.
  • Regulatory changes: Since the 2008 crisis, the cost of complying with complex and new regulations has become significantly higher for wealth management firms. Amid regulations around cross-border transactions, fraud prevention and fiduciary duty, there is now an increased pressure to consider climate risk.
  • Intense competition: Competition among investment advisors is fierce. It is not uncommon for the ultra-rich to be advised by multiple advisors. Advisors who educate and engage investors on sustainable investments have an advantage, as the impressive growth of some sustainability-focused firms indicates.

As wealth management firms navigate these trends, they can pursue new approaches to better represent their clients' values and aspirations, and retain assets. Among them:

  • Move beyond the 'one-off' product approach: Sustainable investing must be integrated throughout the investment value chain, beginning with getting to know customers and their investment goals. Advisors must understand the impact their customers aim to create through their portfolios. CIO teams should incorporate long-term effects of climate change and its associated risks in macro analysis. This should translate into developing investment strategies and solutions that avoid investments in high greenhouse gas emitting companies. Investments should instead be directed towards companies that are able to manoeuver their business models to an under 1.5ºC global temperature rise scenario, improve their overall efficiency of resource utilisation and cope with technological disruption. Finally, as part of portfolio management, every investment should be reviewed through an ESG lens, and its performance in return and impact reported according to customers' expectations.
  • Build the right incentive: A portion of the advisors' incentive should be linked to the assets garnered that qualify as sustainable investments. For CIO, product and portfolio managers, incentives should be based on how well they have factored the ESG risks and opportunities into the recommendation and implementation process.
  • Create awareness: Firms that lack internal capability should hire external consultants to train staff on how to incorporate ESG issues into client discussions, product analysis and portfolio implementation. Externally, firms should create awareness among investors about investment risks and opportunities as the world transitions towards a low or zero carbon economy.
  • Foster diversity: Many women are taking on financial leadership roles and many more are gaining financial independence. Young entrepreneurs from varied cultural backgrounds are generating wealth. It's time to hire and invest in more advisors who are women and who come from multicultural backgrounds, to more effectively manage the wealth of increasingly diverse clients.

As the demand for sustainable investing grows, the complexity of such investments will create a role for wealth management firms that provide access to such investments and then monitor, measure and report their impact.

Firms that demonstrate a differentiated process by helping clients shape portfolios with purpose, will likely see more success in attracting and retaining clients, and in safeguarding their clients' investments from rude climate shocks.


Dazzle Bhujwala is senior manager, Investor Network, at Ceres, the sustainability non-profit