If you're looking to align your values with your investments, here are some questions to consider.
When it comes to managing your portfolio, no advisor has all the answers—but it helps to know the right questions to ask.
This is especially true when it comes to investing with environmental, social and governance (ESG) principles in mind.
Indeed, interest in ESG investing continues to rise, and is particularly powerful among women and millennials. An RBC Wealth Management survey of U.S. clients in 2021 found women were twice as likely as men to incorporate ESG factors into their investment decision-making. And according to a 2019 study from Cerulli Associates, millennials are the generation with the most interest in sustainable investing.
For that younger generation, ESG investments are an integral part of an investment strategy. Another survey conducted by RBC Wealth Management in 2021 focusing on wealthy millennials found nearly 85 percent of respondents agreed that it’s important to align their investments with their values.
“We know millennials feel strongly about ESG,” says Angie O’Leary, head of Wealth Planning for RBC Wealth Management-U.S. “These principles are important to them—they spend a lot of time thinking about this.”
According to the RBC Wealth Management millennial survey, 80 percent of respondents said ESG guides most or all of their investment decisions. And that extends to choosing a financial advisor—92 percent of respondents said it’s important for their advisor be knowledgeable about ESG investing. But for investors new to ESG, it can be difficult to figure out where to start, or what you can ask to learn more. So here are some questions to pose to your financial advisor to get on your way, no matter your age or where you fall on your wealth planning journey.
ESG principles are essentially a more comprehensive way to look at a company or investment, beyond just profit or loss numbers on a balance sheet. By encompassing non-financial information, ESG factors give you a richer view of a company’s risks and growth prospects.
For example, in the environmental bucket, you might ask questions such as: Does an organization have a large carbon footprint? Or have they worked to minimize their impact? Do they deal thoughtfully with pollution and waste issues? Does their supply chain bring up issues of water scarcity and deforestation?
Your journey will be similar in the ‘S’ and ‘G’ parts of the equation. Socially, you would ideally like to see a company with humane and safe working conditions; a positive and productive relationship with labor and customers; and a healthy and vibrant presence in the communities where it operates. Governance issues include an independent board that conducts quality audits, justifiable executive pay, diversity of race and gender among the leadership ranks.
As your research deepens, you might hone in on different subsets of sustainability, like impact investing, where you can draw a direct line to positive results, such as funding a specific clean-energy project.
Of course, this is all highly complex material, and you can’t expect to be an expert right out of the gate. That’s where some initial resources can be helpful, and why an advisor can help you drill down into the ESG issues that really matter to you.
“Job one is to get educated on the fundamentals of ESG,” says O’Leary. “Our surveys have found people are looking to their financial advisors to learn more about ESG, so that comes first. How should you think about ESG—both in the context of what you’re already invested in and any shifts you should be making as a result.”
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This is really what ESG investing is all about: recognizing the real risks that are present in your portfolio and making a personal judgment about whether you’re comfortable with those risks or not.
A mining company, for instance, will have more exposure to environmental risks than most. Other companies may have exposure to things like tobacco, weapons manufacturing, labor troubles in the supply chain or a board of directors that’s not conducting proper oversight.
Measuring all this global data can be highly technical. RBC Wealth Management evaluates ESG data from a number of different sources and evaluates how these factors impact the investments we make, according to Kent McClanahan, vice president of responsible investing at RBC Wealth Management-U.S. Advisors can work with the data to come up with a portfolio that helps you sleep at night.
“Every investment portfolio holds some level of ESG risk,” says McClanahan. “The real issue is what level of risk you’re comfortable holding. If you haven’t evaluated that, you’re flying blind on the topic, so it’s important to have those conversations with your advisor.”
This is one of the very first questions advisors hear, and for good reason. Almost everyone is on board with investing in companies and themes that are good for the planet—but, if it harms your own long-term financial security, that’s another story.
According to Nuveen’s Responsible Investing survey, 85 percent of people say they’re committed to investing responsibly only if returns were the same or better than the alternative.
Now the good news. The emerging consensus is that ESG investing does not hamper investment returns, and in fact might increase them. In a recent report, research firm Morningstar explains, “Sustainable funds outperformed their conventional fund peers in 2020,” with three- and five-year results looking similarly powerful. This past year, three-quarters of sustainable funds finished in the top half of their categories.
Asset managers and clients alike are becoming more aware of this performance trend. In RBC Wealth Management’s 2020 Responsible Investment Survey, 84 percent of respondents recognized that ESG-oriented investing performs as well or better than a more traditional approach.
“Integrating ESG into your portfolio may help returns over longer periods of time,” says McClanahan. “We may see short-term volatility around the benchmark, but over a full market cycle, you may see performance better than the market.”
Your values and goals are unique to you. You’ll want to sit down and discuss these with your advisor before constructing your portfolio.
Once you and your planner are on the same page, you can start putting your values into practice. There are a couple of different ways to approach this. One is through a negative screen where you identify companies that don’t align with your values and remove them from your portfolio. Another is a positive screen, where you actively invest in companies that align with your goals and values.
For most investors, a simpler approach is to identify the right sustainable funds for you. A fund will reduce the need to analyze individual stocks and spread out risk by holding a large basket of equities.
Whichever investment route you choose, you’re essentially authoring the “story” of your own portfolio, which can lead to a positive impact for both you and the planet.
“One of the things I like to hear from my advisor is why I should care about owning a stock,” says O’Leary. “ESG is a great framework for being able to tell a good story. Companies with good ESG may be doing better than companies without. It’s another lens through which to look at your holdings—and a more heartfelt way to connect with your portfolio.”
Due diligence processes do not assure a profit or protect against loss. Like any type of investing, ESG investing involves risks, including possible loss of principal.
Past performance does not guarantee future results.
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
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