The Evolution of Integrating ESG Analysis into Wealth Management Decisions |
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| Authors: | Peter Roselle |
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| Affiliation: | PETER ROSELLE, CPM?, CFP?, has been a Certified Financial Planner? since 1989 whose main focus is helping executives and business owners with retirement and estate planning strategies and their investment portfolios through sustainable investing principles. He obtained the Certified Portfolio Manager? designation in conjunction with The Association of Certified Portfolio Managers and Columbia University in 2010. He advises both for‐profit and non‐profit organizations on improving the alignment of sustainable investing principles in their investment portfolios. |
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| Abstract: | Retail investors rely heavily on the advice of their financial advisors. But relatively few of those advisors have begun to incorporate investment strategies based on environmental, social and governance (ESG) factors for their client's portfolios. The author attributes this lack of interest to the disappointing returns of the “first generation” of ESG retail investment products, which approached the topic through a “socially responsible investing” (SRI) lens with mandates to exclude companies and industries viewed as having negative impact on society. These early “negative screening” directives had the effect of reducing the size of the manager's investable universe, which effectively ensured that SRI portfolio would underperform the overall market. The author, who is himself a practicing financial advisor, proposes that an innovative evolutionary process is underway in which investment managers are shifting away from a penchant for “negative screening” to a more inclusive approach he refers to as “best‐in‐class ESG Factor Integration.” And he identifies three main catalysts for this evolution: (1) greater disclosure of ESG data by public companies; (2) the growing accuracy and accessibility of ESG research, from commercial as well as academic sources; and (3) the inclusion of ESG factors with the traditional value drivers emphasized by the fundamental and quantitative methods used by portfolio managers. Although such integration is yet in its early stages, the author is optimistic that this growing trend will become an important part of an overall sustainable investing movement. No longer confined to large institutional investors, ESG factor integration is now available through a growing number of products and investment platforms. |
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