Care About Climate Change? 8 Questions You Should Ask Your Investment Advisor

BY Michael Pereira Head of Wealth Management Group, Bank of the West

Nov 29th 2021

You already know investing can help create the future you want for you and your family, and for the planet. The question is does your advisor share your belief in sustainable investing?

You’ve probably seen the stream of headlines about dramatic growth in sustainably-focused investing, like CNBC’s “Money invested in ESG funds more than doubles in a year.”1 Investors are eager to apply environmental, social and governance (ESG) criteria to their portfolios because they want to do good for society and the planet. Plus, there are numerous studies that show ESG investments can perform very competitively2 with conventional investments.

More than half of wealthy entrepreneurs and families say they have sustainable investments in their portfolios and 49 percent expect their wealth managers to provide advice on sustainable investments, according to the 2021 Global Entrepreneur and Family report by BNP Paribas Wealth Management.

All ESG funds are not created equal.

Amidst the stampede into sustainable investments, the right advisor can help. Keep in mind that all ESG funds are not created equal, and, perhaps more importantly, some researchers3 are flashing caution lights in the ESG lane.

Just as not all ESG funds are winners, not all advisors who hang out an ESG shingle are really up to the task of managing your money to achieve both social and environmental change and solid financial returns. To achieve your goals in ESG investing, you’ll want an advisor with the right knowledge and experience, and, equally important, their firm should demonstrate a commitment to sustainable finance.

Here are some questions that should help you determine whether an advisor and the company they work for are up to the task of helping you invest for impact.

Questions for Finding an ESG Investment Advisor

1. “What’s your experience with impact investing?”

Ideally, your advisor has experience transforming clients’ portfolios to include impact investments.

Impact investing, which is also referred to as socially responsible investing, or ESG investing, is not an approach that all advisors focus on or are even familiar with. Understanding impact investing requires work, and you want an advisor who has done their homework.

The right advisor will know that investing based on your values does not have to mean sacrificing financial returns. If we just look at 20204, U.S. sustainable equity funds outperformed their traditional peer funds by a median total return of more than 4 percentage points and U.S. sustainable bond funds outperformed their traditional peer funds by a median total return of just under 1 percentage point. Some of that outperformance in 2020 was because ESG funds had less exposure to some of the sectors of the economy wracked by the pandemic.

2. “How can you help me invest with purpose?”

Any discussion of impact investing should begin with an exploration of your values and goals—the principles that should drive your investing. During the height of the pandemic, for example, workplace safety became a hot topic and some investors sought funds and companies that showed a commitment to workers’ rights5. The right investment advisor can help align your social priorities with investment opportunities. Your advisor can help with a straightforward three-step process:

  • Divest: Review all the investments in your current portfolio to see if they align with your values or whether you want to remove them from your portfolio. Do you know what companies are in your mutual funds?
  • Invest: Choose investments that fit your values as well as your risk tolerance and investment objectives.
  • Engage: Many impact investors make their views known through voting on shareholder proxy measures.

3. “What are my options for impact investing?”

Your advisor should be able to guide you through the investment approaches purpose-driven mutual funds and exchange-traded funds take. These include criteria for exclusionary or inclusionary screening or thematic investing. They should steer you clear of funds that may not be as green as they claim and they should be able to uncover new and interesting opportunities.

Impact investing doesn’t have to be all-or-nothing.

Advisors can also design strategies that allow you to choose individual stocks or other securities. Others may offer purpose-driven structured notes or green bonds. Advisors that offer a spectrum of solutions are better equipped to find the one that’s right for your values and objectives.

Impact investing doesn’t have to be all-or-nothing. If you’re just beginning to explore the space, it’s perfectly fine to dip a toe in the impact investing waters before deciding to fully dive in. If you want to do some of your own initial research, a good place to start is the Education Center6 at the Forum for Sustainable and Responsible Investment.

4. “What standards do you use to decide whether something truly is ESG or not?”

The world of impact investing this summer got a wake call about greenwashing7. US regulators are on watch for inflated and misleading claims amidst rising investor interest in sustainable investing. When it comes to investing, beware of advisors and funds that tout something as a good ESG investment without actually paying much attention to the E or the S or the G.

It’s worth asking an advisor what standards they use to decide whether something is truly an impact investment. There are proprietary tools for evaluation as well as many name brand ratings services, such as Morningstar, Bloomberg, MSCI ESG Research, and others with a focus on ESG. If an advisor can’t provide a clear approach to screening investment opportunities then perhaps that is a sign to keep looking for an advisor who truly matches your values.

5. “Do you personalize or target sustainable investment options?”

A good advisor should be able to personalize your investment portfolio to your specific needs and interests. For many investors who want their wealth to make an impact it’s not enough to simply say, “Oh, you care about the environment? Here’s a fund.”

The ability to tailor investments to more specific areas of interest such as water, climate, women’s empowerment, or global development can be a sign that a prospective advisor has deep knowledge of impact investing.

6. “How can I align my investing with my philanthropic goals?”

There’s no reason one’s investing and philanthropy can’t magnify each other’s impact. If your advisor or advisor’s institution helps to manage both your personal investments and your charitable giving, then it creates the opportunity for synergies between the two.

“Over time, your philanthropic and investment dollars can converge to support the same impact goals.

For example, you can put dollars designated for charity into a donor-advised fund (DAF). Assets contributed to a DAF generally receive an immediate tax deduction, and are always invested for tax-free growth. The donor can recommend for assets to be invested in available socially responsible funds, and the proceeds are then donated to charity. Be aware that assets contributed to a DAF can not be taken out; once a donor has contributed assets to a DAF to claim a tax deduction, those assets are no longer accessible other than to be distributed to charity. Over time, your philanthropic and investment dollars can converge to support the same impact goals.

There are almost 120,000 foundations in the U.S. If you’re a part of one, consider using payouts to make program-related investments into charitable organizations. The organization gets financing that might have been impossible to obtain from conventional lenders. The foundation receives a return on its capital.

7. “Aside from investments, what is your CSR stance?”

If you put your money to work helping the world, wouldn’t you want the financial firm you work with to do the same through its corporate social responsibility program, or CSR?

CSR refers to how a company, in this case your investment firm or financial institution, makes a positive impact. CSR can mean donating to non-profits, working with environmental organizations, employee volunteer drives, or other forms of doing good.

While this is separate from your own impact investing, it can be a useful window into how committed your institution is to building a sustainable future.

8. “What are you doing with the rest of my money?”

Often your financial advisor is affiliated with the bank that handles your personal or business bank accounts. Occasionally, they’re separate. Either way, here’s an important question that you may have never thought to ask your bank: What are you doing with my deposits?

“We’re in an era of conscious capitalism.

After all, about 90% of customer deposits in a bank are lent out to finance things such as homes and small businesses. So, do you know if your bank is lending your dollars out in ways that align with your values? The four biggest U.S. banks, for example, finance 30% of all fossil fuel expansion globally.8

That’s why more sustainable companies and organizations are moving their money to banks that are working to accelerate the transition from fossil fuels to sustainable energy. The good done by your impact investing could be canceled out if your deposits are being used to finance the dirtiest forms of fossil fuel extraction.

We’re in an era of conscious capitalism. Investors are realizing that every dollar has an impact, one they can often control. Your advisor can be a vital partner in helping you understand where your money is going—and help you use it to make an impact.

Author image

Michael Pereira Head of Wealth Management Group, Bank of the West

Michael Pereira is Executive Vice President, Group Head of Wealth Management for Bank of the West, and a member of Bank of the West's Executive Management Committee. Prior to leading Wealth Management, Michael headed the bank’s Growth Acceleration team, charged with driving growth and managing key initiatives across all lines of business, including advanced analytics capabilities, performance management, as well as enterprise-wide line of business initiatives focused on growing the company and its customer base. Michael's career with the BNP Paribas Group has covered projects and assignments around the globe in India and China, the Middle East, Africa, Europe and the US.

Footnotes

1) CNBC, “Money invested in ESG funds more than doubles in a year.” https://www.cnbc.com/2021/02/11/sustainable-investment-funds-more-than-doubled-in-2020-.html

2) New York University STERN Center for Sustainable Business, “ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020.” https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf

3) Bloomberg Green, “Trillion-Dollar ESG Boom Rings Bubble-Trouble Alarm in New Study.” https://www.bloomberg.com/news/articles/2021-10-28/trillion-dollar-esg-boom-rings-bubble-trouble-alarm-in-new-study

4) Morgan Stanley, “Sustainable Funds Outperform Peers in 2020 During Coronavirus.” https://www.morganstanley.com/ideas/esg-funds-outperform-peers-coronavirus

5) Reuters, “‘Do the right thing’: Pandemic puts workers’ rights on ethical investor hitlist” https://www.reuters.com/article/us-health-coronavirus-investment-workers/do-the-right-thing-pandemic-puts-workers-rights-on-ethical-investor-hitlist-idUSKBN22D4H7

6) The Forum for Sustainable and Responsible Investment Education Center: https://www.ussif.org/education

7) Wall Street Journal, “U.S. Authorities Probing Deutsche Bank’s DWS Over Sustainability Claims.” https://www.wsj.com/articles/u-s-authorities-probing-deutsche-banks-dws-over-sustainability-claims-11629923018

8) : Banking on Climate Change Fossil Fuel Finance Report 2020, Rainforest Action Network: https://www.ran.org/publications/banking-on-climate-chaos-2021/

Disclosures

Impact investing focuses on investments in companies that relate to certain sustainable development themes beyond traditional financial factors and demonstrate adherence to environmental, social and governance (ESG) practices. Therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market.

The discussions and information set forth herein are for informational purposes only. They do not take into account the exceptions and other considerations that may be relevant to particular situations. These discussions and information should not be construed or used as legal or tax advice, which has to be addressed to particular facts and circumstances involved in any given situation. The discussions and information contained in this article should not be construed or used as a specific recommendation for the investment of assets of any customer of Bank of the West or its affiliates and is not intended as an offer, or a solicitation of an offer, to purchase or sell any security or financial instrument, nor does the information constitute advice or an expression of the Bank’s view as to whether a particular security or financial instrument is appropriate for you and meets your financial objectives. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing herein should be interpreted to state or imply that past results are an indication of future performance. This information is given without regard to the specific investment objectives, financial situations, or particular needs of any person who may review this article. Investors should seek financial advice regarding the appropriateness of any securities or strategies mentioned here. Bank of the West does not guaranty the results obtained from use of any information contained in this article and will not be liable for any investment decision based in whole or in part on the information contained herein. Bank of the West nor its affiliated entities shall be held liable for any content, regardless of cause, or the lack of timeliness of, any information contained in this article. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO THE ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION IN THIS ARTICLE OR FROM ANY “LINKED” WEB-SITE.

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