ESG-Hungry Wealth Firms Call on Managers for Products
Article published on June 19, 2015
By Danielle Verbrigghe
Gatekeepers at top wealth management firms are clamoring for more environmental, social and governance (ESG) and impact investing strategies, pointing to product development gaps. This creates an opportunity for managers to cook up new strategies and position themselves as leaders in this maturing market.
As wirehouses and top brokerages are building out menus of impact or ESG investments, gatekeepers still contend with a dearth of rigorous impact investing options, says William Burckart, founder and CEO of Burckart Consultingand the author of an impact investing report compiled in connection with the Money Management Institute. That creates a big opportunity for managers to come to market with new strategies that dive deeper than just integrating basic ESG criteria to deliver a measurable impact, Burckart says.
"You have the major distributors saying ’we want the product,’ but the shelf is pretty bare right now in terms of mutual funds and [separately managed accounts] that meet the rigor that investors want in terms of impact investing," Burckart says. "Everybody’s experimenting with a broad continuum of strategies at this point, but there are huge opportunities for anyone who wants to go deeper."
Some managers are already taking the plunge to try to develop strategies that apply more rigorous criteria to measuring impact.
"More and more you’re getting folks that say we have basic MSCI [ESG index] alignment, but we’re looking to go deeper and just trying to figure out how," Burckart says. That can mean "looking at existing products and figuring out how to bring more rigor to them, or looking at new product formation."
But managers should keep in mind that as the industry matures, the competition to land on big distributor platforms will only heat up.
"The only thing that prevents [distributors] from taking a really hard line in the field is simply because there aren’t a lot of products right now," Burckart says. "The thing folks need to be mindful of is right now there’s a level of accommodation. Clients are demanding it, so they want to get products up there. But that definitely is going to change and it’s going to change a lot quicker than most people realize."
As the industry matures, it will become more difficult for ESG or impact investment managers to land distribution agreements with top distributors because of increased competition, says Steve Chun, director of marketing and product development for Miller/Howard Investments, a firm that has about $9 billion in assets under management, about half-of which is in ESG-related strategies.
"As more products come out and more managers bring out products to meet that [demand] it will certainly become harder to get approval," Chun says.
For many of the top brokerages, such as Merrill Lynch and Morgan Stanley, impact investing has been a major focus. But many distributors tend to take a broader use of the term ’impact,’ also including ESG and socially responsible investments under the same heading.
"What we’re seeing is a maturing field," says Lily Scott, v.p. and portfolio manager for Morgan Stanley Wealth Management’s Investing with Impact initiative. "There’s not only increasing demand, but there’s also a sophistication in terms of the landscape of investment opportunities, and better tools for analysis and reporting."
Morgan Stanley now offers more than 120 third- party SMAs, mutual funds and exchange-traded funds, as well as multi-asset class portfolios.
"We have a robust offering," Scott says. "But there’s always room for improvement. What we’re looking for is unique strategies, very high quality strategies that are distinctive."
For example, the group occasionally has to take some creative licenses with asset allocation, because of product availability, Scott says. For example, that could mean using an all-cap or large-cap ESG strategy for a small- or mid-cap slice of an allocation.
"We have seen some lag in product development," Scott says.
She points to fixed income-type strategies as an area were the firm is currently looking for more innovation.
"Now, both institutional consultants and wealth platforms are setting up impact investing teams internally to look at the issue," says Sonia Kowal, president of Zevin Asset Management, a firm that has about $600 million in assets under management across SMAs, models and institutional accounts. "They don’t want to be left behind. They’re seeing demand and they’re trying to get out ahead of it."
But some distributors are still learning how to do due diligence on ESG and impact investing criteria, and working out which questions to ask, Kowal says. "Some of them just don’t have the expertise in-house to make those types of comparisons properly yet," Kowal says.
And that can be a problem, because it can be hard to identify which managers are going deep on ESG, and which are just using the label as a marketing ploy, Kowal says.
"When a market explodes as quickly as this one is, you get a lot of substandard products coming to market just trying to ride the wave," Kowal says. "It tars the rest of us with the same brush if they don’t do well."