The issues around sustainability unsurprisingly get big treatment in the annual Boston Consulting Group overview of wealth management trends. Here are some reflections.
Delving in the details of Boston Consulting Group’s wealth management report (see here for a main account), it reminded me of how big the “sustainability” agenda – and opportunity – is in wealth management. The report also has some sharp advice on how firms make the most of it.
Sustainable investing, much of which incorporates “Net Zero” policy over carbon emissions, is growing three to five times as fast as traditional investing, so Boston Consulting Group said in its Global Wealth 2022 study.
“By 2026, we project, this asset class will account for 8 per cent to 17 per cent of privately invested wealth, up from 4 per cent to 11 per cent today,” the report said.
In recent years the drumbeat of noise has risen over concerns about human-caused global warming of the planet, rising sea levels, species loss and increasingly volatile weather. Predicting the adverse financial and business impact of such outcomes is still difficult and at times controversial, however.
For all that the field is not quite as “settled”, perhaps, as some ESG advocates claim (nuclear power is a no-go area for some activists), the trend appears unstoppable in modern finance. Boston Consulting Group said wealth managers cannot try achieve the Net Zero target in a “piecemeal” fashion.
“The competitive bar for excellence in net zero is likely to rise quickly. Leaders need to anticipate how the market will shift over the next decade and set a bold aspiration leading to long-term strategic advantage, such as deciding to make certain net-zero investments a default offer. They also need to establish a set of portfolio and revenue targets for 2026 and another, more ambitious set for 2030,” the report’s authors said. “Especially advanced WMs can even start to calculate their overall portfolio emissions and assess their likely trajectory on the basis of anticipated client behaviour and changes in the WM’s solution offering.”
Wealth managers must be clear on what terms such as sustainable and responsible investing means, the report continued. And that is surely critical.
The report said firms and advisors must use net-zero goals to shape portfolio construction, develop offers, and measure impact. They can help clients translate their values into specific data-backed targets. An example could be accelerating Net-Zero transition by helping to fill the $15 trillion in financing needed to scale alternative decarbonisation, it says.
This appears to be good sense. What BCG also makes clear is that measuring impact requires modern technology to crunch all the data and turn it into forms that end-clients can digest. To some extent also, this fits with the never-ending wealth management topic of delivering a great customer experience. The more effectively firms can communicate with clients how their investments are making a difference – and also earning returns – the more loyal clients will be.
BCG said that innovation is essential. “As clients grow more interested in net zero, plain-vanilla products won’t be enough to attract them. For example, a WM might talk to a client about how climate transition efforts are spurring innovations in alternative fuel sources for the aviation industry and bring associated investment opportunities that meet the client’s portfolio criteria,” it said.
There’s lot to think about here, and BCG appears to be hitting a number of sensible points. Clearly, a big reason for the sustainability story in wealth management is that firms know this goes down a treat with younger clients (just how well it will continue to do so depends on how long energy prices are elevated, however). Trillions of dollars are up for grabs as the Silent Generation and Baby Boomers pass on. Being sustainable also helps firms to further burnish their image just a decade on from the 2008 market crash.
What the BCG report doesn’t reflect on is how viable Net Zero is as a policy goal (to be fair, that is not its remit). Not everyone is “on-message”. In late May, HSBC suspended Stuart Kirk, global head of responsible investing, from his post, after telling a Davos conference that central bankers exaggerated climate risks in an attempt to “out-hyperbole the next guy”. (HSBC chief executive Noel Quinn was quoted saying that Kirk’s views did not reflect the bank’s views.) In addition, controversies over the “greenwashing” of investments have erupted, piquing the attentions of regulators.
The HSBC kerfuffle shows that these aren’t easy issues. Russia’s invasion of Ukraine, which along with pandemic disruptions, anti-carbon energy policies in some countries, and even central bank money printing, have sent energy costs soaring. Can solar and wind fill a gap unless massive and reliable battery storage is a reality? There is also the question of where batteries are made. One of the largest producers of lithium – used in modern batteries – is China. Russia produces about 11 per cent of the world’s high-grade nickel, another important component in such tech (source: Forbes).
Some of these considerations are outside the scope of the BCG report, and whatever wealth managers think of the issues, they have to be aboard the sustainability train, and be seen to be so. It may not always be a comfortable ride, but if Boston Consulting Group is correct, it will be a profitable one.