From direct investments with ESG alts sponsors to engaging with alt platforms, financial advisors are under pressure to identify more environmentally-friendly investment solutions for clients
As megafire season kicks into high gear on the West Coast and severe drought conditions across many regions intensify, there is a growing recognition of the negative impact of climate change.
And with that recognition comes a rising focus across the wealth management space on ESG (environmental, social & governance) investments, with an emphasis on “environmental.”
Our latest Wealth Solutions Report survey of financial advisors across the country, completed in late July, reveals the following:
- 67% of financial advisors have experienced an increase among clients who have asked about ESG investment opportunities
- 84% of these client inquiries have referenced anxiety or concern about recent perceived manifestations of the impact of climate change, such as megafires, drought conditions, flooding and severe hurricanes.
- These financial advisors work with clients across the wealth spectrum, encompassing mass affluent (defined by WSR as net worth between $100,000 to $1 million), high net worth (or HNW, with over $1 million to $30 million in net worth), to ultra-high net worth (or UHNW, over $30 million in net worth).
- 73% of financial advisors who report an uptick in client inquiries on ESG investing note that these requests come from clients or younger members of client families who are between the ages of 25 and 45.
- 77% of these financial advisors reported a greater openness among clients in ESG retail alternative investments, versus more traditional equity and fixed income vehicles, such as mutual funds and ETFs.
Embracing the “E” in “ESG”
Harry Grand, Senior Managing Director of Angeles Wealth Management, an RIA and multifamily office that specializes in serving HNW and UHNW clients, said, “There is a growing acceptance among younger and older generations of wealthy families that climate change is real, and its effects could be very damaging to the economy.”
Grand said changing sentiments in this segment of the wealth space are being driven in part by the changing demographics of the ranks of the rich.
“Much of the growth in the HNW and UHNW client segments over the past decade has come from newly wealthy younger individuals from sectors such as technology, private equity and hedge funds.”
“Younger and newly-rich individuals who share the passion that many members of their generation feel about ESG causes don’t need to seek permission or consensus with older family members to deploy their money towards mission-driven investing strategies.”
The Rise of ESG Alts
With this sea change in attitudes about ESG investing has come a greater openness among clients to ESG alternative investments, versus relying on traditional equity and fixed income vehicles.
In Grand’s experience, “The thinking used to be that the economics of ESG investing were always going to be less robust compared to other strategies. But accepting lower investment returns for supporting a worthy cause made it all OK, depending on the investor’s personal values and priorities.”
“But increasingly, certain ESG alts potentially offer opportunities for returns that are robust in their own right, even excluding public subsidies or tax credits.”
Industry experts agree that the proliferation of ESG alts for retail investors in recent years provides more opportunities than ever for financial advisors to align their clients with environmentally-focused investment solutions.
The two most popular paths for clients working with a financial advisor are to invest directly in a specific product sponsor’s offerings, or to invest through a platform that offers access to multiple investment solutions and strategists.
“A Non-Concessionary Approach”
When it comes to product sponsors that specialize in ESG alts that can be sold to mass affluent, HNW and UHNW clients, Greenbacker Capital stands out as an example of an asset manager that consistently touts the importance of taking a “non-concessionary approach.”
Greenbacker acquires renewable energy physical plants, including solar and wind farms. Newly acquired assets are added to Greenbacker’s investment portfolio, and they typically all have long term contracts to sell power to creditworthy counterparties such as utilities, municipalities and corporations. Investors can access Greenbacker’s investment portfolio via financial advisors across family offices, RIAs and broker-dealers.
Today, the firm’s renewable energy infrastructure assets are valued at more than $1 billion and more than one gigawatt of clean power generation capacity (according to past Motley Fool coverage, one gigawatt can power 300,000 homes).
But Robert Sher, Greenbacker’s EVP of Capital Raising, remembers the uphill climb in educating wealth managers about their investment solutions when Greenbacker first lanched ten years ago. According to Sher, one of the single biggest misconceptions was the belief that renewable energy investing must be concessionary.
All too frequently, Sher was greeted with the assumption that investors in ESG alts would have to accept lower returns by investing in renewables, because renewable energy would never be cheap enough to compete with natural gas or other fossil fuels, absent substantial government subsidies.
But those misconceptions have been increasingly put to rest in recent years.
Sher emphasizes, “The economics of electricity generation support the development of more renewables, as they are often the most cost effective projects. This, in turn, is part of the reason why renewables have made up the majority of new electricity generation put into service over the last two years.”
The Devil is in the Details – with Developer Relationships
Multiple ESG experts warn, however, that successful direct investments in renewable energy infrastructure investing requires an ability on the part of the asset manager to build productive relationships with all of the key players involved in the process – Especially developers and operators.
Asset managers that are perceived to have taken unfair advantage of developers and operators can see a dramatic reduction in their pipeline of deals, as the renewable energy community remains fairly tight-knit across the board.
According to Sher, when Greenbacker Capital first started building its investment portfolio a decade ago, there were many owner-operators of clean energy infrastructure projects that “functioned like miners in a gold rush – staking a claim in uncertain conditions.”
Predictably, some developers and owner-operators did quite well financially, while many others found themselves in a financially difficult position.
In Sher’s view, “Some investors took advantage of these developers and operators during this period, using the developers’ need for capital as a point of leverage to get the best deal for themselves, and blindsiding them with price changes at the last minute.”
“We, on the other hand, took a different approach, running a transparent operation from the very beginning. Over the last decade, Greenbacker has built incredible, long-term relationships with experienced developers and operators. Our investment offerings reflect the work that goes into building such relationships with our partners on the ground.”
What About Retail Alts Platforms?
What if financial advisors and their clients want to minimize concentration with any single ESG alts manager?
For those seeking a more diversified ESG alts experience, there are a number of retail alts platforms that have emerged in the past decade, including large firms such as CAIS and iCapital Network, as well as more nimble players such as Crystal Capital Partners and Kelly Park Capital.
While each of these platforms differ in the details of their offerings, they share in common the ability to help financial advisors align their clients with multiple ESG alt strategies at meaningfully lower minimum investment levels.
According to Dean Rubino, CEO of Kelly Park Capital, one of the biggest challenges for financial advisors seeking ESG alts solutions for their clients is the relative lack of access to multiple institutional quality ESG investment options, which his firm provides.
“ESG investing has proven mercurial over time as definitions change, trends change, culture changes, and impact of the investment remains difficult to objectively measure. This makes it difficult to start with a purportedly ESG investment and work backwards toward discerning quality and potential performance.”
With this context in mind, Kelly Park Capital’s due diligence team prioritizes the valuation of the quality and performance potential of various alts strategists, with hedge funds frequently offering the right mix of qualities for financial advisors and their clients.
In Rubino’s experience, “A hedge fund’s flexibility of mandate and ability to allocate resources and put capital to work quickly enables them to take advantage of investment opportunities which ETFs, BDCs, and mutual funds structurally cannot.”
“We look for investment strategies which exploit this hedge fund advantage. We start there and sometimes these strategies are ESG. One example is a fund which purchases farmland, improves upon it, and leases it back to, mostly, family farmers. Not only does this support preserving and improving upon farmland, many of the crops feed the organic, healthy food chain.”
Rubino also said that Kelly Park Capital’s approach can also be utilized to reach multiple additional investor goals in one fell swoop, such as diversification of existing real estate holdings, owning hard assets as a hedge against inflation and dollar devaluation protective features.
Looking Ahead for ESG Investing
Erik Oros, Chief Investment Officer of Gideon Strategic Partners, said that retail alts platforms can be useful in managing some of the more difficult aspects of alts investing – including managing capital calls, providing K-1 filings and financial reporting.
However, Oros believes that, for Santa Monica, CA-based Gideon Strategic Partners – which specializes in supporting HNW and HENRY (high earnings, not rich yet) client relationships – retail alts platforms will continue to be utilized as just one component of a broader ESG strategy.
Oros said Gideon Strategic Partners will frequently combine participation in retail alts platforms with directly sourced private investment opportunities throughout his firm’s ecosystem of strategic relationships that function as a family office network. This approach delivers greater levels of diversification and more investment choices for clients, provided that due diligence is conducted very thoroughly.
“As institutional quality managers continue to design products that are more well suited to UHNW and HNW clients, we continue to believe this is a space that we will increase our exposure to. We have been able to identify managers that – through their strategies of targeting a very particular niche within the ESG space – will continue to attract capital and provide attractive returns.”
Harry Grand at Angeles Wealth Management agrees about the crucial importance of due diligence and product expertise when it comes to ESG alts.
“There’s no question that the ESG investing space is positioned for continued growth for quite some time to come. Renewable energy, broadly speaking, appears to be well positioned to expand.”
“But this doesn’t mean that every ESG investment – including renewable energy alts – will be a winner. As with any investing strategy with an emerging sector, clients need to make sure their wealth manager has extremely sophisticated manager selection and product due diligence capabilities.”
Michael Madden, Contributing Editor & Research Analyst, can be reached via email at firstname.lastname@example.org