Discover more from Callaway Climate Insights
Jeff Gitterman on why advisers are hesitant to jump on the ESG train
Asset manager recommends ways for advisers to train to meet the demand from investors for environmental funds -- and how investors can find those advisers.
(Robert Powell, CFP, is the editor of TheStreet's Retirement Daily, a columnist at USA Today; and host of the Callaway Climate Insights podcast.)
BOSTON (Callaway Climate Insights) — Millennials and Gen Z’ers get it. Larry Fink, the CEO of BlackRock, gets it. Investment advisers? Not so much.
“It’s interesting that one segment doesn’t seem to be getting it (ESG investing) fast enough,” Jeff Gitterman, a co-founding partner of Gitterman Wealth Management, said in a recent interview.
And what’s needed to change that, according to Gitterman, is training.
ESG product proliferation is there. Customer demand for ESG products and investments is there. And the only thing lacking is the adviser.
“I think demand would actually be accelerating, dramatically, if we had advisers really understanding that intersection between the product and the client demand,” Gitterman said. “I think they’re a little nervous about it. It takes a deep interest (in) and understanding of both the product side and the client side to be able to navigate that. So there’s been a hesitancy of advisers to really jump on board with these themes.”
Gitterman is, of course, doing his part to train advisers. He hosts conferences focused on ESG investing, and a video program focused on ESG investing for Fintech.TV.
Plus, the firm is launching on June 18 a unified managed account (UMA) ESG platform for advisers and individual investors.
“We realize that if we were going to have a big impact on the capital markets, we needed the advisers to get on board with it,” he said. “And in order to do that we needed to educate them.”
According to Gitterman, the time is right for advisers to incorporate ESG investing into their service offering. In addition to the demand and supply being more than adequate, there’s the issue of performance. Such funds are outperforming non-ESG funds in this year’s market turmoil.
“ESG is a great additional due diligence process. ESG is a way, if you’re doing active management, of actually looking for companies that have a better chance of long-term sustainability, especially in the changing landscape than traditional companies might have.”
To be fair, he says much of the outperformance can be attributed to the lack of fossil fuel investment in many ESG funds. “So I always caution people to be careful about attributing alpha to ESG,” he says. “To me, ESG is a great additional due diligence process. ESG is a way, if you’re doing active management, of actually looking for companies that have a better chance of long-term sustainability, especially in the changing landscape than traditional companies might have.”
Part of the training also needs to focus on helping people understand what ESG investing is and what it isn’t. For instance, ESG is not an investing theme. “ESG is a bunch of data that you can use to analyze the non-financial metrics of companies,” he said.
Calling something an ESG fund is a bit of a misnomer. “What exactly is an ESG fund?” Gitterman asked. “I’ve talked to most of the major asset management firms that are doing ESG analysis and they don’t call themselves ESG funds. So, we were not even sure if the comparison pools are accurate.”
Ultimately, it’s hard to tell whether a fund is ESG or not from the prospectus or the name. What’s more, he said there are funds that say they are ESG that he wouldn't call ESG.
Opportunities for advisers
At the moment, there’s plenty of opportunity to train advisers about ESG. Just 6% of advisers have a deep interest in ESG or sustainable investing. “We’re crossing that chasm from early adopter to early early majority. And I think that’s where you typically see the biggest adoption of a product… I think over the next year or two we’re going to see huge adoption by advisers.”
According to the just published Financial Planning Association’s 2020 Trends in Investing Survey, 26% of advisers indicated they were currently using or recommending ESG funds with clients in 2018. That percentage remained steady at 26% in 2019 and increased meaningfully to 38% of advisers currently using or recommending ESG funds in 2020.
What’s more, nearly a third (29%) of advisers indicated in the 2020 survey that they plan to increase their use or recommendation of ESG funds over the next 12 months. And almost 40% of advisers indicated that, in the past six months, clients have asked them about investing in ESG funds.
Focus for RIAs
From his vantage point, Gitterman says the adoption will be greatest in the RIA community “where there tends to be a bit deeper client relationship, where business is less transactional and more service-oriented.”
Brokers, meanwhile, will need model portfolios on Envestnet and other channels, including those from Gitterman Wealth Management. “We’re trying to make it as easy as possible to adopt these strategies and provide these services to (an adviser’s) client.”
There will be a quiz
So, what kind of questions should individual investors be asking of advisers with respect to how well they know ESG?
First, Gitterman recommends that investors go to the adviser’s website. Check whether they have published articles about ESG investing. Check the due diligence they use for picking ESG investments and/or portfolios. Check whether they are in favor of passive or active investing.
If they are passionate about ESG investing, they are going to make that case on their website. “Otherwise, it’s just a side hustle,” he said. “I think that’s the first defining thing.”
Learn the adviser’s position on climate change and whether it’s consistent with your position.
Measurable and identifiable factors
Gitterman looks at four measurable and identifiable factors with respect to climate change: extreme weather, extreme heat; more floods; and more droughts. And rating agencies, such as Moody’s, are starting to factor climate change data into their evaluations.
“If I’m an investor, my mortgage pool — in downtown Houston where flooding has been extreme, or in Northern California, with droughts, or downtown Miami, also where flooding has been extreme — is at risk of being priced differently than my Colorado mortgage pool or my Vermont mortgage,” said Gitterman.
“Right now what I say to advisers is there’s no cost to remove that risk from your portfolio, right? Because it’s not priced yet. … If we can actually see that this data is really good, accurate, relevant, and why wouldn't we start pricing that into our portfolios or de-risking them?”
Besides avoiding risks, Gitterman is also using climate change data to identify opportunities. “... We think you can design portfolios that start to avoid some of the imminent danger that’s coming. And on the other side of it, you can also look for opportunities.” That would include companies that make flood walls, or generators, or air conditioners.
Building the Unified Management Account
The next step in the evolution of ESG investing is the UMA. In essence, Gitterman is taking a group of the best ESG-focused money managers investments and bundling them into one account for an adviser and individual investors. The UMA provides certain tax advantages not available with mutual funds. Plus, Gitterman has partnered with Natixis to build the UMA. Among other things, that firm manages the Natixis Sustainable Future Funds, which is a family of 10 funds with target dates out to 2060 that are designed to help investors build a nest egg for a specific date in the future when they plan to retire.
Bottom line for Gitterman: “I think advisers are a lever that can drive capital towards the solving of problems. And if you’re really a steward of your client’s money and wealth over the long term, and if you’re not thinking about these problems that could unwind or create more risks to them, you’re not being the steward or the fiduciary that you say you are. So I think advisers have to step up to the new reality and think of themselves as stewards and fiduciaries and take that responsibility to heart.”