Advisors And Their Clients Can Guide Firms To ESG Compliance While Guarding Against Greenwashing, Especially For Alternative Investments
When environmental, social and governance (ESG) investing started gaining prominence in recent years, many companies embraced the trend. This led to some practices that have become known as “greenwashing” – where companies deceptively advertise something as being more environmentally friendly or “green” than it really is, in an attempt to gain greater investment or more sales revenue.
With the Securities and Exchange Commission cracking down on greenwashing, it’s more important than ever to do ESG right. In 2019, our firm made a commitment to be become fully ESG integrated. As a global multi-family office, we’re determined to help companies maintain and elevate their ESG standards, while emphasizing alternative investments.
We hope the lessons from our experience can help wealth management firms, financial advisors and their clients with their ESG initiatives.
Like most firms, we want to maximize profits while remaining cognizant of the planet’s carbon footprint. We hired a consultant to develop a road map to follow ESG policies and procedures. Now our firm has a dedicated staff member for internal ESG processes and investments, and we help companies attain ESG compliance. This benefits the environment, and makes companies more appealing to environmentally conscious investors.
Aligning With Alternatives
A wealth management firm should strive to put its clients’ assets in investment vehicles that align with the clients’ values. When investing in a company that doesn’t currently meet industry ESG standards, it may be possible to help that company make progress toward those ESG standards.
In fact, one way to combat greenwashing is for investors to allocate capital to businesses that want to make improvements, and not just companies that already are ESG-focused. Alternative investments present numerous opportunities to lead companies forward.
As an illustration, we had a client who was a partner in a business focused on helping large companies improve their energy efficiency by implementing LED lighting. When the opportunity arose to replace fluorescent lights with LEDs in a shopping mall in Brazil, where our firm has two offices, we helped facilitate the transition. This was a low-risk investment because the mall needed lighting, while the new lights promoted environmental energy savings.
Real estate is an alternative investment class with a lot of room for ESG improvement, as ESG compliance requires an extensive understanding of property management that goes far beyond mere energy-saving appliances or planting trees.
One of our clients that specializes in luxury real estate initially believed that simply planting trees would sufficiently offset their carbon footprint. We conveyed that this measure was not enough and urged them to become ESG compliant, as well as to track their efforts and progress toward meeting industry ESG standards.
Financial advisors can help their clients track the ESG compliance of investments by assembling data and reports that are comparable across specific time periods, to determine the ESG progress of those investments.
We use a proprietary scorecard with companies that we help along the ESG path, to assess various internal and external factors by a three-step evaluation process. The first step is creating a “materiality matrix” to determine key focus areas in order to become ESG compliant. The next step is developing policies to address these areas. The third step is establishing goals and tracking progress over time.
A tracking system that employs a consistent rating methodology enables companies to work toward a higher score and communicate their progress to stakeholders. This helps foster sustainable investments and provide a common framework, as there isn’t yet a global standard for assessing ESG factors. Advisors can help their clients invest in companies that follow such a process, and wealth management firms may even benefit from following this kind of process themselves.
At least some of a client’s investments should be in companies that are successful and fully ESG compliant. This can help protect the environment and the client’s portfolio, while avoiding brand reputation problems from companies that face scrutiny over greenwashing.
The steps outlined above can help advisors pay close attention to how companies report ESG initiatives, and how that reporting corresponds with company actions, in order to minimize the effects of greenwashing on client portfolios.
Working toward ESG compliance is essential, and companies should ensure that it’s done correctly. With climate and environmental changes drawing significant global attention, companies around the world will likely need to adopt effective ESG policies and processes in the future.
Firms that commit to being early adopters will make a substantial difference for investors who seek to be ESG leaders. Financial advisors and their wealth management firms can contribute to this progress by showing ESG-focused clients how to invest in genuine ESG leaders.
Dany Roizman is the Founding Partner of global multi-family office Brainvest Wealth Management with offices in Brazil, the U.S. and Switzerland.