Is it ESG? Or Just a Load of E…‘BS’…G?

Doesn’t it seem like Wall Street can monetize a movement like nobody else? Perhaps that’s what makes it so interesting when one of its own blows the whistle to question authenticity.

Tariq Fancy, former Chief Investment Officer of Sustainable Investing at BlackRock, recently provided a scathing opinion piece on the current state of ESG investing. He not only obliterated the view that an ESG focus is beneficial but went so far as to categorize it as detrimental.

If accurate, this conclusion impacts financial advisors in multiple ways that are worth understanding now, while this movement continues to pick up mainstream appeal in the U.S.

Impact on Financial Advisors’ Clients

If you are an advisor who incorporates ESG investing, or whose clients demand an ESG focus, then you need to be considering what your clients are hearing.

When they start asking questions, will they be convinced of genuine motives on your part (and from the asset managers with which you partner)? Or will they feel duped by “PR spin” or “marketing hype,” as Fancy puts it?

Advisors need to know – and be able to defend – the methodologies they employ to articulate them to clients when they ask. (Or, even better is articulating them before clients ask with a proactive conversation about how the ESG strategy in a client’s account isn’t a marketing stunt.)

Impact on ESG Strategy Selection

Of course, we’re making a big assumption that the ESG strategy you’re using or considering really is “one of the good guys.” Are YOU confident that it is?

Financial advisors who want to provide a compelling ESG story should focus on asset managers and strategies that emphasize transparency, as well as education.

Transparency breeds confidence in the way that “showing your work” did for your algebra teacher. Perhaps it seemed she was just being difficult by asking you to provide the justification for your end result, but in most cases, she simply wanted evidence of the thought process for how you arrived at your conclusion. Strategy development and execution is no different. It is one thing to say you have a great strategy, but a trustworthy manager need not fear showing why.

Additionally, you can better grow and improve your practice when your partner supports your ability to provide client education. When your partner arms you with intelligence about the strategy on an ongoing basis, you gain the ability to go on the offensive rather than simply react to questions from clients.

We think selecting an ESG manager that offers transparency and regular portfolio updates helps clients, not only in returns, but also in experience and education.

Impact on Regulation

The dreaded “R word” – regulators.

Fancy noted that, in March, the SEC created a taskforce to “proactively identify ESG-related misconduct.” Will this be limited to the product manager, or also extend to advisors who use them?

It is too early to say for sure, but even if advisors are clear of any regulatory consequences, it won’t dampen the impact from clients who realize their advisor placed them in an investment deemed fraudulent by a state or federal oversight agency.

Our Take: Transparency & Trust

This topic is important to us – not only because Blueprint Investment Partners offers an ESG strategy based on the same systematic investing principles we have offered financial advisors across other risk-managed strategies for years – but also because it is tied to two values we hold dear: transparency and trust.

Transparency is so important to us that we openly share our systematic investing rules for all to view and hold us accountable. And, we invest a tremendous amount of time helping educate our partner advisors and providing content they can in turn use to help their clients.

We created the Blueprint U.S. ESG Strategy because we believe the most underrated aspect of ESG is that it can improve the odds a client will stick to the plan, allowing an advisor to help them reach their goals. We think this, combined with a portfolio management process also aimed at improving the odds of achieving the investment/client goal, provides a dynamic combination for advisors.

Service Over Hype

When an otherwise effective movement like ESG is diluted for purposes of pushing product to the masses and making a quick buck, it hurts everyone in the industry, including your clients. Fancy likens it to offering wheatgrass to a cancer patient. Though well-marketed and profitable, it is ultimately harmful because it distracts from treatments that stand an actual chance of helping the patient.

The parallel for our industry is that the “wheatgrass ESG products” not only don’t truly achieve environmental, social, and justice standards, but they also erode credibility for legitimate ESG strategies.

Fancy concludes his opinion piece by urging government to step in more aggressively to curb abuses of the ESG framework in the industry. Perhaps this is indeed best. In the meantime, financial advisors must take ownership and do what is optimal for their clients and practices.

The bottom line is that advisors need to be wary of the hype. This is partially for their own good, and perhaps more importantly, it’s for clients, who trust advisors to identify genuine opportunities.

Whether looking for a core portfolio solution, downside protection, or an effective ESG strategy, advisors should seek out partners and strategies that let them view behind the curtain and under the hood to enhance client’s trust, improve the odds of success, and avoid surprises. Failing to do so really isn’t much different than providing poor or misleading service – clients and regulators alike will eventually take notice.