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One size does not fit all: Finding the right ESG investments for wealthy clients

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The world’s wealthiest people are increasingly putting their money to work for the causes that are most meaningful to them. We see this in initiatives like the Giving Pledge, which over 200 billionaires have signed, vowing to donate a majority of their wealth to philanthropic endeavors. The more wealth that high-net-worth families generate, the more they seek to give away. While donations like these are deeply impactful, high-net-worth individuals are also realizing that as a companion to giving, they can harness the full potential of investing in companies that align with their values

EY’s 2021 Global Alternative Fund Survey found that when asked to rank the top areas where they want their asset management firms to strategically focus, investors’ ranking of ESG initiatives increased the most year over year. The investors who ranked it as a No. 1 priority jumped from 17% percent in 2020 to 22% in 2021, indicating a growing demand.

Though it’s simple in premise, finding the right sustainable investments for wealthy clients often proves too complex in practice. At the root of the challenge is the fact that ESG investing means something different to each individual. For some, it means applying stringent criteria to filter out investments, while for others it means investing in companies in order to influence positive change from the inside. The key for an adviser is to ask the right questions to develop a custom strategy aligned with the client’s goals rather than making assumptions.

For example, a nuclear power plant might look like an investment in clean energy to one client but like a nuclear risk to another. Alternatively, an engineered meat company may not appeal to a client who values organic food above all else, while another might see that company as a potential solution to the climate’s methane problem.

THAT BEST FIT

Because of its subjective and limiting nature, relying on an ESG label can hinder your ability to find that best fit. Once you understand your client’s values, you can think beyond traditional ESG companies — for example, data centers. There’s nothing overtly sustainable about a data center, except for one that’s created to be ultra-energy-efficient with water-cooled facilities that significantly reduce the carbon footprint. There are plenty of sustainable investments like these that aren’t listed on any ESG platforms.

As with any investment, there’s no such thing as perfect when it comes to ESG investing. There will always be trade-offs involved, and searching for perfection almost always leads to paralysis. Instead, broaden your search beyond the label and aim for the best possible fit without sacrificing high standards.

By expanding your search, you start in a better position to find a substantial number of quality options to choose from. If you start with 100 potential investments, you might end up with two or three appropriate ones. We reviewed 10,000 potential investments in order to narrow it down to a couple hundred, only some of which are relevant to any individual client.

Once you find those hidden gems, encourage your clients to engage and inspire their peers to invest alongside them. The potential for positive impact is that much greater with more individuals involved and financial advisers have the opportunity to lead the way for groups of like-minded investors.

Overall, we live in a fusion generation. We have fuels that are a mixture of ethanol and fossil fuels. You can walk into a Burger King and order an Impossible burger. While your client’s values may be clear-cut, the investments almost never are. Instead, encourage them to think in terms of “as much as possible” when incorporating their values to invest in the companies that will work toward the future they want to live in.

David Mann is head of Raymond James’ Private Institutional Client Group.