As investors become more comfortable with integrating environmental, social and governance (ESG) factors into their portfolios, the investment focus is poised to grow exponentially in the next decade. At least that's the story that Linda Zhang, PhD, head of Purview Investments, believes to be true.
Zhang believes that the full integration of ESG analysis into investment portfolios "will eventually become part of mainstream portfolio construction processes." Accordingly, now is the time for advisors to learn about ESG and how it will affect their work.
"The current ESG ETF landscape is far from perfect," says Zhang, "with [its] focus on individual factor analysis." She believes that, through better company-focused due diligence, advisors can help their clients start integrating ESG more effectively into their portfolio strategies. (See also: 3 Trends to Watch in ESG Investing.)
Reexamining the ESG ETF
Zhang’s firm, Purview Investments, has a mission to "make investment solutions transparent, accessible, institutional-quality to both individual and institutional investors." Through Purview, Linda and her team also advise exchange-traded fund (ETF) issuers and index providers on product innovation.
At Purview, Zhang launched an ETF portfolio strategy guided by ESG principles in January 2018. Purview Impact Solutions is a global multi-asset product, with holdings consisting primarily of ESG principled ETFs and Impact ETFs. According to Zhang, the new generation of ESG ETFs invest in firms making direct positive impacts using ESG principles, such as investments in renewable energy, sustainable infrastructure, human capital and healthy living, among other inclusive factors. Zhang calls them Impact ETFs.
Impact ETFs contrast with traditional ESG ETFs, which are often built on exclusive factors, such as avoiding investments in heavy fossil fuel polluters, firms with a weak governance record, or those selling weapons and firearms. An advisor, for example, can construct bespoke portfolios holding ETFs that invest in renewable energy-focused Impact ETFs along with traditional ESG ETFs that exclude fossil fuel polluters. Zhang says that institutional investors, foundations and high-net-worth clients are now using similar combined strategies. (For more, see: How ESG, SRI and Impact Funds Differ.)
Client Demands Outpace Advisor Adaptations
Zhang is emphatic that, over the next few years, "advisors who remain unconvinced about ESG factor integration may be judged harshly by their clients, especially their women and millennial clients, over 80% of whom want ESG considerations to be part of the overall investment selection process." They also want the ability to identify specific ESG issues for advocacy through direct company share ownership or pooled-fund investment objectives, and they want these choices in both their retirement and non-qualified investment accounts.
Fortunately, there are multiple resources available to advisors who see the opportunity ESG factor integration combined with ETF portfolio construction provides for growing their practice in the years ahead. For example, a conversation with women and millennial investors can begin with an explanation of how closely major industry firms like MSCI track ESG factors through their research and ratings. The MSCI ESG Leaders Indexes target companies that have the highest ESG rated performance in each sector of the parent index. This index suite identifies companies that have demonstrated an ability to manage their ESG risks and opportunities, which makes them suitable for inclusion in the pooled-fund ETF strategies mentioned by Zhang.
Most major ETF providers – iShares, Vanguard, Fidelity, State Street Global Advisors, Pax World and Calvert, among others – are now offering index-based ESG ETF strategies that invest by sector, by industry, by market cap, and by environmental, social and governance issue-specific factors. For example, the SPDR SSGA Gender Diversity Index ETF (SHE) seeks to provide investment results that correspond generally to the total return performance of the SSGA Gender Diversity Index. Advisors should be confident that there is no shortage of product supply to meet the growing demand of ETF investors looking to incorporate ESG factors into their personal investment policy statement or institutional mission-aligned portfolio strategy. (For some perspective on the best funds available, check out: Top Performing Socially Responsible ETFs.)
Impact ETFs Offer a New Approach
Financial advisors targeting the market for a share in managing this wealth should consider the WE network of chapters around the country as places to develop new skills related to the ETF and ESG marketplaces. They may also broaden their industry mentoring and referral networks in the process.
Zhang integrates her professional expertise into mentoring and supporting the career development of other women in the industry. Zhang, along with other co-founders, started WE (Women in ETFs) in 2014, a non-profit organization that brings together over 4,000 members, including women and men, in chapters in major financial centers across the United States, Canada, EMEA and Asia Pacific to further the careers of women by leveraging their collective skill and ambition.
"Women are under-represented in leadership roles in many industries," she says. "In asset management, for example, female portfolio managers are outnumbered 10 to one." The advancement of women in finance is painfully slow, despite the studies at industry-leading firms like MSCI, Credit Suisse and State Street Global Advisors, all of which have demonstrated that gender diversity in the workplace positively affects a company's bottom line performance across multiple metrics.
WE creates opportunities for professional advancement and offers guidance for the current and next generation of women in ETFs through education forums and idea sharing across the industry. "Placing more women on company boards of directors is valuable and important," says Zhang, "It is equally important to address the gender gaps in hiring, in promotion and in pay." (For additional reading, check out: Gender Lens Investing: Growing Interest, Increasing Options.)