How SRI is Reshaping Private Wealth Management

Social investing has become a universal theme, yet the practical application remains as personal as the individual. Where one investor may demand the exclusion of fracking from their portfolios, another investor may want increased exposure. Climate control, human rights, adherence to religious guidelines, and over 30 other socially responsible themes all impact not just how wealth is managed, but also the trusted relationships that exist between investors and their advisors.

Aided by access to information now afforded by mobile apps, for example, individual investors are beginning to take control of the power paradigm and drive the conversation around socially responsible investing. They are helping their advisors construct portfolios and allocation strategies that align with their personal or family values.

Consolidated reporting allows investors and their advisors to understand the aggregated portfolio’s total ESG score and compare that score to personal benchmarks, or drill down to view ESG scores by manager, country, sector and account, right down to individual public and private securities.

Traditionally, investors judged performance based solely on benchmarks and basis points. But with the proliferation of social media putting the spotlight on global ESG concerns, this has changed. A growing number of ultra high net worth investors, particularly Gen X and Millennials, have been inspired to define investment success in terms of ESG-weighted performance.

Beating an index by a few basis points means little if doing so violated an individual’s personal ethos. For those investors who are focused on socially responsible investing, they are equally concerned about making choices that influence their financial objectives as well as their social goals. The ability to leverage private wealth to influence how businesses operate will have a growing and profound impact on the global financial system for years to come.

Socially responsible investing is an undeniable and increasingly formidable trend. The United Nations’ Principles for Responsible Investment (PRI) has grown to over $34 trillion in assets since its 2006 launch. Superior investment returns are helping to drive this growth. In an 18-year Harvard Business School study published in 2012, companies with high sustainability programs achieved above-market returns that were 4.8 per cent higher than their counterparts with low sustainability performance, and with lower volatility. But the true driver of SRI adoption is the growing trend among investors in the private wealth segment to measure their personal significance not by the amount of wealth they possess, but rather by what they do with that wealth.

Here are two examples of how SRI is quickly reshaping private wealth management:

• Susan is a successful entrepreneur who works with several investment managers and private banks to manage her wealth. She reads an article on the effects fracking has on the environment, and she wants to understand her total exposure to this segment. From her iPad, Susan identifies fracking as an ESG issue, then views which companies within her portfolios are associated with fracking. She can also see if any particular investment manager has overweighed fracking. She contacts her advisors to discuss reducing or excluding fracking from her portfolios, taking into account the expected performance and associated risks of her decision.
• Mark, an advisor, has a new client that permissioned Mark to view all of her investments across all managers for better oversight of her wealth. After running an ESG screen for the themes that are most important to his client, Mark learns that one of his client’s managers allocated 3% of her portfolio to countries that have a poor track record on human rights. Knowing this is an important issue for his client, Mark proposes a new set of investments that are more aligned with his client’s personal values and, in doing so, is trusted with a greater share of his client’s assets to manage.

Through technology, investors are gaining an unprecedented level of personal empowerment, as well as knowledge. At the same time, technology is arming advisors with the tools to enhance their visibility and ability to deliver a truly personalized level of client service. The industry, at both the advisor and client level, is undergoing a period of transformation, raising standards and expectations across the board.

Craig Pearson, CFA, is co-founder and CEO of Private Wealth Systems, an industry-defining financial technology company that provides consolidated investment reporting solutions to sophisticated investors and their advisors. www.privatewealthsystems.com

This article was originally published in Family Wealth Report on March 12, 2015.