An Opportunity to Connect: Using ESG to Grow Your Business
Understanding the interests of Millennial and Gen Z clients is an increasingly important consideration for investment counsellors and portfolio managers. Daniel Stanley, Director, Institutional & Advisory, examines the role Responsible Investing and ESG solutions can play in deepening relationships with younger clientele.
According to Fortune magazine, “today’s millennials and Gen Z investors have more economic power than any generation that preceded them. They are earning more, saving more, and investing earlier and at a higher rate than previous generations.”1 And this doesn’t even account for the wealth transfer that’s currently underway, which is moving “tens of trillions of dollars”1 into the hands of these younger investors. Clearly, investment counsellors and portfolio managers who want to grow their wealth management franchise need to better understand the interests of this younger generation of investors.
While conventional wisdom suggests that millennials and Gen Z investors are glorified gamblers, the facts state otherwise:
- One in four millennials who save has more than $100,000 in savings, and they’re investing with a different set of expectations than their parents: 95% say they want to use their financial capital for socially responsible investing.2
- Two-thirds of this group own stock, and 57% report that they have sold stock when they think the company is not serving the best interest of society or our planet.2
While the issue of responsible investing is often framed in relation to an investment counsellor and portfolio manager’s fiduciary obligations, there’s also a legitimate business reason to consider incorporating responsible investing into your business — it provides a launch pad to discuss investment issues and connect with the next generation of investors. Investment counsellors and portfolio managers who want to grow their franchise must incorporate broad responsible investing themes like the Environmental, Social and Governance (ESG) issues that drive the behaviour of millennial and Gen Z investors.
Investment counsellors and portfolio managers who want to grow their wealth management franchise need to better understand the interests of this younger generation of investors.
What is responsible investing?
Responsible investing is an umbrella term that includes several different topics. Sustainable investing has a focus on companies making a net positive contribution in addressing social and environmental challenges; thematic investing focuses on specific issues like women in leadership or renewable energy; ethical investing is a process of negative screens to exclude companies with an adverse social or environmental impact (like the Energy sector); impact investing focuses on generating and measuring the social and environmental benefits of an investment; and lastly, ESG integration is the process of integrating ESG factors that affect companies into the financial analysis and accounting process so that ultimately those issues are reflected in the valuation process. The simple unifying principle in all approaches is the desire to allocate capital in a clean and responsible manner.
Why does responsible investing make sense?
According to Morgan Stanley3, 99% of millennials are interested in responsible investing — they care as much about how the return was earned as they do about what the rate of return actually was. Despite this, only 56% of investors have said that their Advisors asked about investment goals outside of financial performance, and 83% of Millennials believe in the myth that responsible investing leads to sub-par returns, more than any other age group. The latter two statistics aren’t surprising given that responsible investing is an abstract concept that means different things to different people; there are no standard measures and definitions of responsible investing and trying to reach consensus on the issue of RI is a challenge even under ideal circumstances. It should come as no surprise, then, that an investment counselor or portfolio manager might be hesitant to raise the issue.
But herein lies the opportunity. Millennials and Gen Z investors are most interested in responsible investing but very few investment counselors and portfolio managers are stepping up to engage them on the topic. It follows that those who are willing to lead will reap the rewards.
How to talk about responsible investing
In discussions with younger clients, questions about responsible investing goals and objectives should be front and center alongside questions about investment objectives and risk tolerances. The goal is to unearth the client’s purpose and get a sense of what’s important to them. Given the complexities of responsible investing, it’s critical to ask important questions like “what does responsible investing mean to you?” and “what are your investment and responsible investing objectives?” The answers to these questions will guide your remaining discussions with the client.
It’s equally important to deal with any objections or misconceptions. As noted above, many Millennial and Gen Z investors still believe in the responsible investing performance penalty — the idea that performance will be negatively affected by excluding certain swaths of the market. Nowadays, there are several responsible investing options that look like the broader market in all respects except that they adhere to a methodology that cleanses the opportunity set. It should also be pointed out that there’s very little transparency regarding the true costs facing corporations when it comes to various environmental, social and governance issues. These true costs could hurt companies in the future and present serious risks to the investor. Cleansing the opportunity set brings these non-balance sheet liabilities from footnote to forefront, and having a consistent and transparent process to identify those liabilities and risks will ensure that your youngest investing clients become your best clients in future years.
Those who are willing to lead will reap the rewards.
Incorporating responsible investing into portfolios
While there are several active managers advertising various sustainable, thematic, ethical and impact investing strategies, we believe that passive, low-cost, transparent, and rules-based ESG integration is the best approach for investment counsellors, portfolio managers and their millennial and Gen Z investors. There are several reasons for this.
For one, many younger investors may not feel comfortable being stewards of wealth, or they may have a sense of apathy toward the process itself. In a passive process, the rules are transparent, so it’s easy to ask important questions up front and engage the younger investor by checking in with questions like “are we comfortable with these rules to cleanse capital?” and “what, if any, compromises are going to have to be made to make progress?”
Also, given that 83% of millennials believe in the myth that responsible investing leads to sub-par returns, it’s important to focus on solutions that minimize tracking error and look like the index. Passive methodologies track broad indices and have none of the idiosyncratic risks of using different active portfolio managers to manage ESG solutions across your book of business.
Lastly, index strategies have universal application and uniformity across geographies and market capitalization, ensuring consistency across all mandates. The index providers have strong RI/ESG credentials, as well as extensive benchmark index methodologies and highly reliable data sets. This improves your ability to measure and monitor the solution on a regular basis, minimizing the risk of any ESG surprises and accusations of “greenwashing.” The risk of “greenwashing” should not be understated, especially when dealing with a younger generation of investors that feels strongly about ESG principles.
At BMO, we have a number of index-based ESG ETFs ranging from actively managed to index-based:
Responsible Investing ETFs
Equity
BMO MSCI ACWI Paris Aligned
Climate Equity Index ETF ZGRN Distribution Yield:
N/A | Q Mgmt. Fee: 0.25% Risk Rating: Medium new | BMO MSCI Canada ESG Leaders Index ETF ESGA Distribution Yield: 3.9% | Q Mgmt. Fee: 0.15% Risk Rating: Medium | BMO MSCI EAFE ESG Leaders Index ETF ESGE Distribution Yield: 3.0% | Q Mgmt. Fee: 0.25% Risk Rating: Medium | |
BMO MSCI Global ESG Leaders Index ETF ESGG Distribution Yield: 1.8% | Q Mgmt. Fee: 0.25% Risk Rating: Medium | BMO MSCI China ESG Leaders Equity ZCH Distribution Yield: 1.2% | A Mgmt. Fee: 0.60% Risk Rating: Medium to High |
Asset Allocation
ESG Themes
BMO Brookfield Global Renewables Infrastructure Fund GRNI Distribution Yield: N/A | Q Mgmt. Fee: 0.8% Risk Rating: Medium |
Fixed Income
BMO ESG Corporate Bond Index ETF ESGB Duration: 5.5 Distribution Yield: 3.4% | Q Yield to Maturity: 5.2% Mgmt. Fee: 0.15% Risk Rating: Low | BMO ESG US Corporate Bond Index ETF ESGF Duration: 7.2 Distribution Yield: 3.9% | Q Yield to Maturity: 5.3% Mgmt. Fee: 0.20% Risk Rating: Low | BMO Sustainable Global Multi-Sector Bond Fund ZMSB Distribution Yield: 3.7% | Q Mgmt. Fee: 0.60% Risk Rating: Low to Medium |
Source: Bloomberg, BMO Global Asset Management, as of December 31, 2022.
Annualized Distribution Yield: The most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV.
Yield to Maturity: The total expected return from a bond when it is held until maturity – including all interest, coupon payments, and premium or discount adjustments.
These diverse Responsible Investing strategies are compelling in and of themselves. But, as a group, they are excellent tools for investment counsellors and portfolio managers to facilitate discussions and forge new connections with millennial and Gen Z investors.
For more information on BMO’s Responsible Investing solutions, reach out to your regional Institutional BMO ETF Specialist.
2 Bank of America Better Money Habits® Millennial Report, Winter 2020.
3 Morgan Stanley, “Sustainable Signals: Individual Investors and the COVID-19 Pandemic,” 2021.
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