Practice Management

Growing an ESG-Focused Business with Success

Frank Arnold and Michael Higgins discuss the importance of the ESG evolution for advisors, and how reflecting client values – and their own beliefs – propelled their business growth.
February 2020

Frank Arnold and Michael Higgins

Generational Wealth Management Group

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As early adopters of ESG factors, for the past 20 years, Frank Arnold and Michael Higgins of Generational Wealth Management of Raymond James, have built their practice with RI principles at the core. In this issue of Insights, they discuss the importance of the ESG evolution for Advisors, and how reflecting client values – and their own beliefs – propelled their business growth, one referral at a time.

ESG Evolution: The Early Days to Now

Responsible Investing (RI) and the integration of Environmental, Social and Governance (ESG) factors have been our core focus since the early 2000s, crystallizing when we teamed up with Mr. Brian Pinch – a Canadian RI pioneer. We both took courses in sustainability and the environment during university, so we were passionate about combining this with our financial discipline, and continuing down this path to build Generational Wealth Management. And it shows: RI accounts currently make up approximately two thirds of our $200 million book.

In the last two decades, ESG has evolved tremendously as clients – and the general population – have become more conscious of these factors in their day-to-day decision-making. ESG considerations are no longer at the sidelines, and there is more appetite than ever to incorporate them into our processes. The simple part for us is just letting clients know that this is an available avenue for their investments, and asking whether they’re interested, because it’s amazing how many people are excited to partake. Though there are still misperceptions that we need to correct – such as the mistaken notion that an ESG portfolio company is considered “perfect,” or that there’s always a performance penalty – they are now fewer and far between.

RI accounts currently make up approximately two thirds of our $200 million book.

A major part of this perceptible shift has been reframing the conversation from “is this a bad or good company” – which is closely tied to the early days of ethical investing (a subset of RI) – to analyzing non-traditional financial metrics as legitimate risks from a business valuation standpoint. RI assets now account for more than half of all Canadian assets under management (AUM), with the market representing $2.13 trillion in 2019.1 The message is clear: a transition is underfoot for the investment management industry, and is leading in the institutional arena, where ESG factor analysis is now table stakes for a conventional pension fund.

From Millennials to Retirees…ESG Matters

What does this mean for Advisors? Millennials are a large and vital demographic for our business, and ESG issues matter to them. They’re big believers in climate change, and they want to see progress. With all the recent natural disasters, it’s evident that climate change is no longer a future threat; it’s current. The bottom line is that if you’re not adopting ESG considerations into your practice, you’re at a much bigger risk of losing assets in the $30 trillion intergenerational wealth transfer taking place over the next few decades.2 We strongly believe RI will eventually become a base-case expectation. Just look at how recycling played out – now, no one under the age of 40 would ever think not to recycle, whereas 20 years ago, this was not the norm.

But it’s not just the younger generation – RI is becoming more prevalent across all demographics: interest in sustainable investing among the general population of investors jumped from 71% in 2015, to 85% in 2019.3 We see the evidence of this on a day-to-day basis. Most of our retiree clients are starting to think beyond their own lifetime, and ESG integration is rising to the forefront for them. They have deep conversations with us about what the world will look like for their grandchildren, and they want their money managed with the next generation in mind. We strive to ensure that whether it’s providing for their loved ones responsibly, or donating to a charitable cause that’s important to them, clients can be confident their wealth plan creates a lasting legacy, and a multi-generational sense of identity.

Most of our retiree clients are starting to think beyond their own lifetime, and ESG integration is rising to the forefront for them.

Ticking ALL the Boxes

Importantly for us, RI is not just something we’ve happened into in the last three months – rather, it’s what we’ve been practicing for two decades. That level of commitment is a massive differentiator for our business.

We have the in-depth expertise to incorporate ESG smartly – and strategically. Sometimes, there is the perception that it’s all about investing into speculative, high-risk renewable energy companies, and we’ve had clients confide in us about their past experiences when they were pushed outside their comfort level on the risk spectrum.

This couldn’t be further from what we do. In our practice, we’ve always prided ourselves on our comprehensive process, which includes traditional, rigorous investment analysis, followed by an additional ESG layer for which we source proprietary and third-party data. We don’t view RI research as a substitute to conventional investing; instead, our overall goal is to construct a high-quality, balanced portfolio with risk and return characteristics that align with ALL of our clients’ objectives – from both a financial and altruistic perspective. Much of our success can be attributed to our demonstrated ability to build an ESG portfolio that not only provides consistent returns, but also mitigates risk so our clients can achieve peace of mind. There are no shortcuts for us: our investments tick all the boxes, in terms of needs and wants.

Much of our success can be attributed to our demonstrated ability to build an ESG portfolio that not only provides consistent returns – but also mitigates risk so our clients can achieve peace of mind.

Walking the Walk

To incorporate RI successfully, it’s important to look at it from beyond a sales perspective. Clients don’t want to come into your office and feel like they’re going to be sold on something. They want to meet with a like-minded Advisor who will guide them down a financial path that’s comfortable for them. Authenticity is essential here, and in our business, it’s a key trait that resonates with our clients who increasingly want to align their money with personal values.

At Generational Wealth Management, we walk the walk. ESG is not just lip service for us. Our clients know that we’re not only committed to them, but we also truly believe in protecting the environment, active community engagement and advocating for change. We both  cycle to and from work; we’re sponsors of  a number of local conservation and environmental groups; members of the Responsible Investment Association (RIA); and importantly – we invest in our own portfolios alongside our clients. And it pays off: approximately 90% of our business growth is from referrals of existing clients to family or friends who are interested in RI. Many of our prospects already know about our specialty before they walk in our door – either because of an event we’ve sponsored, or a charity with which we’ve worked. This level of trust filters through our practice in so many ways – from investment management to becoming a dependable client resource on personal matters like whom to choose as an executor, mortgage advice or even home insurance.

Approximately 90% of our business growth is from referrals of existing clients to family or friends interested in RI.

ESG: Out in Front

Building this valued reputation takes time, but the simplest place to start is just by asking your clients if they would be open to RI, if the option were available. In our experience, the answer will rarely be no, especially if you can demonstrate they won’t be missing out on returns. And for potential new clients, it’s a conversation starter and a way to demonstrate your value-add – especially on the education front, since RI is an umbrella term that covers several different types of investing. For instance, we often take the time to explain to our clients that a company with a high ESG rating is not necessarily given an “ethical” stamp of approval, but may very well be the best among its peers due to shareholder engagement, or another point of progress. And because of our track record, we can easily dispel the myth that investors have to give up performance to incorporate ESG into their decision-making.

Frank Arnold and Michael Higgins on BMO Global Asset Management

In addition to our continuous RI efforts, we work exclusively with quality product partners that conduct their own internal ESG analysis and screening, because even for our conventional accounts, we would consider any gap in this area a huge blind spot. If a manager specifically told us they weren’t integrating ESG factors – that would be an inevitable deal breaker for us. In our view, BMO Global Asset Management consistently delivers on our high ESG expectations and does a lot of that important work for us.

RI By the Numbers

Canadian RI AUM of $2.13 trillion, up 42% over a two-year period1

95% of millennials interested in sustainable investing3

Nearly $4 billion flowed into ESG funds in the first three quarters of 20194

85% of individual investors are interested in sustainable investing, up 10% from 20175

89% of millennials expect their financial professional to do a deep ESG dive into a company prior to investing6

To learn more about RI, or for other ideas to enrich your practice and add value for clients, contact your BMO Regional Sales Representative, or access the resources below.

Decoding Responsible Investing and ESG

Responsible Investing: Creating a Sustainable Advantage for Your Practice

Responsible About Investment

 

Also in the February 2020 issue of Insights:

How to Proactively Integrate RI into Your Practice

ESG ETFs: A New Toolkit for Retaining Next-Gen Assets

Disclosures

  1. Responsible Investment Association, 2018 Canadian RI Trends Report, October 2018.
  2. Global assets. “Swipe to invest: the story behind millennials and ESG investing,” MSCI ESG Research, January 2020.
  3. Morgan Stanley Institute for Sustainable Investing: Sustainable Signals — The Individual Investor Perspective (2019)
  4. Hale. “Sustainable Investing Interest Translating into Actual Investments,” Morningstar, 2019.
  5. Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals – Individual Investor Interest Driven by Impact, Conviction and Choice,” 2019.
  6. Allianz, “Findings from the Allianz ESG Investor Sentiment Study,” May 2019.

 

Raymond James Ltd. Disclosure:

Frank Arnold and Michael Higgins of Generational Wealth Management are Financial Advisors with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The view and opinions contained in the article are those of Frank Arnold and Michael Higgins, and not Raymond James Ltd. Raymond James Ltd. member of Canadian Investor Protection Fund.

 

BMO Global Asset Management Disclosures:

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms. 

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under license.

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This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. The testimonial(s) in this article may not be representative of the experience of other people/advisors. The testimonials are no guarantee of future performance or success. These are solicited testimonials.

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