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Is ESG Investing Reaching a Tipping Point?

Broadridge Distribution Insights is pleased to present a high-level discussion about ESG on The Point, our podcast with Principal Matt Schiffman. On today’s episode, Schiffman talks with Broadridge Insight’s Head of ESG Assets Jag Alexeyev about the issues surrounding ESG’s current rise in popularity and what it all means for our industry.

Below is a brief excerpt from their conversation. Click here to listen to their discussion in its entirety.

MS: Jag, what's driving ESG adoption in the U.S. marketplace?

JA: Multiple factors. First and foremost, industry participants now recognize that ESG is financially material. In other words, ESG factors influence corporate performance and shareholder value. Earlier approaches to ESG or socially responsible investments, or SRI as it was known then, were based on ethical considerations. What we are seeing now is an increasing awareness of the magnitude of certain ESG risks, such as climate change and energy risk, combined with a growing conviction that investors can make a difference. Regulators have also played a key role in driving adoption.

MS: Has the pandemic been a factor?

JA: Yes, the reaction of corporate executives to the pandemic, and especially their reactions to workforce practices, raised awareness among the public as to social issues within companies and across the supply chain.

MS: Can you explain some of the different ways asset managers approach ESG?

JA: Sure. Managers have several tools they use to achieve their ESG objectives. The most familiar is exclusionary screening, which means getting rid of something in a portfolio that might be viewed as harmful, controversial, or risky. But because screening or divestment involves giving up shareholder rights, it is not seen by some asset managers or investors as the best way to affect change. With shareholder engagement, or active ownership, a manager can work with company management to identify risks and transform operations to improve ESG performance over time.

Another approach is positive screening or best-in-class screening, where managers choose to invest in firms with better ESG profiles or improving ESG profiles. But by far, the most common approach is systematic holistic integration of ESG factors in the investment decision-making process and then through shareholder engagement.

MS: As the conversation around ESG increases, we have been hearing the term “greenwashing.” What is greenwashing, and is it a concern?

JA: Greenwashing is a misalignment between investor expectations and what the asset management company does or what the financial intermediary or financial advisor is delivering. Oftentimes it's a misunderstanding of what ESG is about and the spectrum of different ESG investments. Or it could be intentional or unintentional greenwashing that arises from a number of different factors. It's become the focus of investigation for European supervisory authorities. The recent sustainable finance roadmap, for example, has put it as a centerpiece of what they are trying to understand and how to improve ESG investing.

MS: Our surveys show a pickup in interest by retail investors. Why do you think that is?

JA: The public today has a greater awareness of a wider range of issues that they care more deeply about—issues such as climate change, social and economic inequality. The media has picked up on that zeitgeist and amplified it. Coupled with this awareness is a growing belief that, as consumers and investors, we might have the power to help affect change. Organizations such as and the divestment movement deserve credit for raising the level of awareness and empowering investors and stakeholders. For example, students at universities are pushing endowments towards greater accountability. Overall, it's been an evolution as investors and asset managers have been identifying financially material ESG issues and engaging with corporations about them. The corporations themselves are connecting the dots between ESG and shareholder and stakeholder values. CEOs are talking about sustainability and the media amplifies that message. All of this translates into increased interest from retail investors.

MS: What should financial advisors know about ESG?

JA: First, there's not one approach to ESG. The topic has become more nuanced, and advisors need to continually educate themselves. And they need to try harder to understand client preferences. As mentioned earlier, there's a giant risk of misalignment of that understanding, and advisors need to manage very carefully that.

Second, there is evidence that performance does not suffer through ESG, and this concern really should have been laid to rest a long time ago. But luckily now we have countless studies done both by asset management companies and by the academic community and a few big meta studies that show ESG does not necessarily result in worse performance, and that it could actually improve long-term shareholder value. Advisors should be more proactive and prepared to share that evidence to put these concerns to rest.

Finally, six out of 10 financial advisors use ESG in their solution set and that number is growing. If you're one of the four that don't, you're likely putting yourself at a competitive disadvantage. With wealth trickling down to younger generations that seem to care deeply about ESG, this is likely to become an issue.

MS: How can asset managers help educate advisors and their clients?

JA: Managers must be more creative about engaging with advisors. Easy-to-understand and focused material is needed that advisors can share with clients. Firms should be ready to deliver information in different formats, aligned with the many ways people process information, whether that is in print or online, or through podcasts, webinars, and videos. What matters is not only the authenticity and transparency about the investment process, but also the outcomes a manager is able to achieve and the impact they're having in the real world by using ESG and sustainable investment strategies. They must share their stories from portfolio managers and stewardships on how they are really making a difference, despite all the challenges.

MS: I would agree with you 100%. In our surveys, advisors tell us that they look to the asset management community first as the top source of information. Clearly, the asset management community has an opportunity to educate advisors and their clients on this most important topic. Jag, thank you for sharing your thoughts and educating us about ESG.

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