Responsible investing (RI) is no longer a niche interest for the odd client who wears socks with Birkenstocks. Increasingly, RI is becoming the future of investing. Financial advisors who are looking to provide valuable services for their clients in the years ahead should be prepared to talk about carbon intensity and climate risk as easily as discussing risk/return and portfolio diversification.
The demand for investment advice that takes environmental, social and governance considerations into account is only going to grow in the years ahead as climate-change risks, in particular, loom ever larger as considerations for both governments and corporations. Millennial investors, particularly wealthy millennials, already demonstrate greater demand for RI than previous generations did.
Research from Switzerland-based UBS Group AG on the world’s billionaires found that a healthy share of the world’s richest investors (38%) are engaged in RI; almost half of surveyed billionaires (45%) plan to increase their exposure to these investments in the next year; and 39% anticipate the demand for RI to continue growing in the years ahead as their massive wealth (a total US$8.9 trillion) is handed down to the next generation.
Indeed, high net-worth investors of the future are growing up in a world in which social purpose is valued alongside investment return and in which the bottom-line benefits for companies that operate with long-term sustainability as a key objective become increasingly evident and prized by investors.
Yet, as matters stand, there may be hidden carbon risks in many clients’ portfolios. For example, investors who have large allocations to Canadian index funds and ETFs may be exposed unwittingly to large environmental risks, given the benchmarks’ heavy weightings in the resources sector.
Helping clients unpack and deal with these covert risks in their portfolios is going to be the value RI-savvy advisors will be able to provide. Simply buying units in a so-called “green” fund for the odd client may have been all that advisors needed to be able to do in the past.
Looking ahead, advisors must ramp up their sophistication and know-how in order to meet the growing demand for sustainable investing.