The Power of Money

I subscribe to Fr. Richard Rohr's Daily Meditations, from the Center for Action and Contemplation. This one was beautiful and so I want to share here, as exploring our relationship with money is the central theme of many of my blogs. "In her book The Soul of Money, Lynne Twist explains the power we’ve given our image of money and reminds us of our true longings and needs.

Money is not a product of nature. Money doesn’t grow on trees. . . . Money is an invention . . . a fabrication. . . . Money still facilitates the sharing and exchange of goods and services, but somewhere along the way the power we gave money outstripped its original utilitarian role. 

We have made money more important than we are, given it more meaning than human life. Humans have done and will do terrible things in the name of money. They have killed for it, enslaved other people for it, and enslaved themselves to joyless lives in pursuit of it. . 

For most of us, this relationship with money is a deeply conflicted one, and our behavior with and around money is often at odds with our most deeply held values, commitments, and ideals—what I call our soul. . . . I believe that under it all . . . what deeply matters to human beings, our most universal soulful commitments and core values, is the well-being of the people we love, ourselves, and the world in which we live.

We really do want a world that works for everyone. We don’t want children to go hungry. We don’t want violence and war to plague the planet. . . . We don’t want torture and revenge and retribution to be instruments of government and leadership. Everyone wants a safe, secure, loving, nourishing life for themselves and the ones they love and really for everyone. . . . I also believe that under their fears and upsets, even the deepest ones, everyone wants to love and be loved, and make a difference with their lives. . . . I believe people also want an experience of their own divinity, their own connectedness with all life and the mystery of something greater than we comprehend.

Each of us experiences a lifelong tug-of-war between our money interests and the calling of our soul. When we’re in the domain of soul, we act with integrity. We are thoughtful and generous, allowing, courageous, and committed. . . . We are open, vulnerable, and heartful. . . . We are trustworthy and trusting of others. . . . We feel at peace within ourselves and confident that we are an integral part of a larger, more universal experience, something greater than ourselves."

Lynne Twist, The Soul of Money: Transforming Your Relationship with Money and Life (W. W. Norton & Company: 2017, ©2003), 8-9, 11-12, 17.

Source: The Power of Money by Fr. Richard Rohr

The rise of ESG Investing

I met a financial advisor for a coffee a few weeks ago. He wanted to pick my brains about ethical investing. He said he wanted to be 'more green' and wanted my advice on building ethical portfolios for clients. He seemed to think ethical investing was merely about avoiding tobacco and arms; it's moved on a lot, I said, as I rolled my eyes, questioning whether he was willing to be truly committed and informed about the world of ethical investing. I came across this great piece of investment research by Calvert Research and Management called 'The Rise of ESG Investing' which talks about the latest trends and client drivers. It also talks about financial advisors and their attitudes towards ESG. The study is US based. However, I think it translates well to the UK market too. I marked out some interesting bits and listed them below with my comments.

On Millenials

Born between 1980 and 2000, Millenials command wealth, a social conscience and power. By 2020, it is estimated they will make up 46% of the workforce. This is a generation with sway and swag, who hold social responsibility, social justice, equality and environment causes as top priorities.

Research quoted in the report states that 53% of millennials make investment decisions based on social responsibility factors, compared to 42% of Gen Xers, 41% of baby boomers and 39% of seniors. I don't see too many millennials in my advisory practise and I really enjoy seeing them when I do; but it is encouraging to see the younger generations voicing themselves so clearly.

ESG Takeaways

Advisers should incorporate basic ESG questions and filters into their initial discussions of goals and objectives with current and prospective clients and take a proactive approach to identifying needs and interests. 

I strongly agree. I don't push ESG investments as a 'right' or 'preferred' way of investing; it is not for everyone, and yet, the client has a right to make an informed decision - ESG or not. I imagine advisors enjoy offering a broader menu of options to clients and those who have worked hard to acquire expertise & conviction in ESG investing reap the benefits in attracting investors interested in responsible investing.

For many advisers, portfolio performance is a non-issue when it comes to ESG considerations. It ranks near the bottom of the reasons advisers utilize it; for non-users, ESG's limiting of investment options ranks near the top of considerations. Just 29% of advisers believe there is a positive correlation between corporate financial performance and ESG factors. While manager selection for ESG strategies may be limited compared to the broader universe of funds and managers, the menu is increasing in size. Overall, investment research broadly suggests that the performance of socially conscious funds has a "positive tilt relative to the overall universe of funds". While returns may not be a real hurdle, there is an increasing breadth of options - and potential strategies - that advisers can utilize.

Returns aren't a hurdle. True.

There are around 113 funds that meet the ESG/Ethical criteria as regulated funds for clients in the UK so yes, the universe is smaller. Also, the menu of available investment options excludes passive funds (there are a few, but they don't meet enough criteria to be included in any meaningful way) which means clients may pay a bit more for an ethical portfolio which necessarily includes actively managed funds and consequently higher fees than passive funds. However, more and more, I see a greater abundance of options including with company pensions, such as the L&G Future World fund focused on climate change, which is encouraging.

Adviser usage of ESG factors

The strongest indicator of adviser utilization of ESG factors was the level of client interest in social and environmental issues and, secondarily, the adviser's own knowledge of responsible investing as well as their performance of the importance of evaluating ESG factors for client portfolios.

I have met clients who are keen to invest ethically but then are put off by an adviser's own biases; I believe this is more to do with the advisers own level of felt competence in the area than the facts of whether ESG is an inferior strategy as an investment option or not. 56% of advisors cite client demand as the main reason to utilize ESG. Among advisors who don't use ESG investments, 58% said their clients are not interested in ESG factors, 29% said it leads to limited investment opportunities and 22% said it leads to poor or limited returns; I hear that last one most often too when I talk about it informally with advisor colleagues.

ESG factors brought up most often in client meetings

Among all ESG factors, the "E" - environmental - draws the most client interest. In our survey, 39% of advisers said that clean technology was one of the most commonly prioritised ESG criteria in client meetings, followed by climate change (35%) and emissions and waste (26%). 

An ethical investment questionnaire now has so many factors to it including pornography, human rights violations, genetic modifications, product stewardship and animal welfare.  It has definitely moved on from a simplistic negative screen of avoiding tobacco and arms companies. The survey also lists under social and governance issues the factors most frequently mentioned were human rights (22%) and corporate transparency (16%).

Knowledge stands in the way

Just 38% of responding advisers in our survey answered "Yes" to our question, "Do you feel knowledgeable when it comes to ESG investing?" Aside from client demand, advisers cite moral/ethical reasons as the secondary driver for their use of ESG.

38% is quite a large number. So, for clients who are looking to invest ethically or with ESG in mind, going to a knowledgeable advisor on ESG makes sense.

Further resources:

Ethical investing: Positive and negative screening criteria

Three myths about Ethical Investing

Sustainable tourism: A week in Morocco

Growing a Culture of Social Impact Investing in the UK