Thursday, May 25, 2017

Sustainable Investing aka Capital Destruction

4 Reasons Sustainable Investing Is Entering the Mainstream
First, by adding ESG to your practice, you are swimming with the tide of investor interest rather than against it. We've been wearing out this tune, but millennials and women consistently indicate high levels of interest in sustainable investing, and these two broad categories of investors are commanding more and more assets. As the massive intergenerational transfer of wealth starts to happen, money will flow into the hands of younger investors, who will be about as likely to be women as men. It's possible that millennials' interest in ESG is merely a lifecycle effect that will moderate over time as they grow older, perhaps less idealistic, and more focused on making money without regard to the societal and environmental impact of their investments. But I doubt it. Their interest in ESG seems more in line with what public opinion experts call a cohort effect, which is likely to persist over time.
They won't stop destroying capital until they've lost all their money.
Second, selecting investments for your clients' portfolios that consider how well companies are managing environmental, social, and corporate governance issues is a way to reduce risk. The risks of poor corporate governance have long been recognized by analysts, while those relating to environmental or social factors are less well understood. Nonetheless, firms that manage environmental issues poorly have to deal with costs from fines, litigation, and cleanups, while also facing reputational risks for poor environmental stewardship.
Since government can coerce compliance, this makes sense. Especially if the company's customers are into progressivism. It's not as important if you care more about profits (cash in the bank) than perception (stock price today).
A third reason to add ESG to your practice is the opportunity to connect with clients on a deeper level. The job of an advisor is no longer limited to simply picking investments based on a risk-tolerance questionnaire. A robo-advisor can do that. Real-life advisors are becoming more like "money counselors" for their clients, helping them forge healthy relationships with money and the ways it can enhance their happiness. An advisor able to help those highly interested in sustainability make a difference with their money will develop a deeper bond than many advisors have with clients.
Get religion!
Finally, incorporating sustainable investing into your practice can be a great way to differentiate yourself and your practice. There is still a first-mover opportunity in many markets. With sustainable investing already entrenched among institutional investors and with an estimated $9 trillion in assets in the United States and $23 trillion globally, it isn't going away. If you have an established practice, adding an ESG capability may help you retain assets as your older clients pass money to younger generations--or when married women, who tend to outlive their husbands, take control of their investments.
1. Start an investment advisory
2. Focus on "sustainable investing"
3. Lead a purity spiral
4. $$$
5. For your personal account, invest in "unsustainable investments"
6. $$$

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