CHICAGO — Financial advisor Kristina Van Liew describes herself and her business partners as “reluctant pioneers” dragged by a client into the field of environmental, social, and governance investing about 10 years ago.

“He basically said to us, ‘Listen, I need you to embrace a different way of thinking. If you tell me that I’ve got to give up something in order to do this, you’re fired,’” Van Liew recalled during a panel at Morningstar’s Investment Conference. “And this millennial wealth inheritor was worth about a billion dollars so, for the advisors in the room, I was not going to accept the answer that we were fired.”

The Morgan Stanley private and institutional advisor now traces roughly two-thirds of the Chicago practice’s $7.6 billion in assets under management to some form of sustainable, impact or value-aligned investments. And she calls ESG “probably the single largest growth opportunity” in the advisory space.

ESG investment assets

Worldwide sustainable investment assets jumped more than fivefold to nearly $23 trillion between 2006 and 2016, according to data from the Global Sustainable Investment Review cited by Morningstar. Retail investors’ share of the assets grew by 15 percentage points to 26% in the last four years of the period.

Morningstar and Sustainalytics, an ESG research firm, launched sustainability ratings for funds in 2016, and Morningstar purchased a 40% stake in the firm the following year. In May, the two firms unveiled carbon risk scores, which Morningstar uses to evaluate a portfolio’s exposure to fossil fuels.

Advisors’ use of ESG data on Morningstar’s platforms quadrupled in 2017, according to CEO Kunal Kapoor, who calls ESG investing “the new normal.” Helping clients assess their portfolio’s impact doesn’t require advisors to take positions on issues like climate change, he said in a speech at the conference.

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“Now I know that the elephant in the room is that many of you are either not convinced that ESG is real or you’re not sure how to impactfully integrate it into your practice,” Kapoor said. “That’s just the reality. I hear that from many of you when I go out and talk to you. I want you to know that you don’t have to choose between returns and sustainability.”

The search for alpha and strategies aimed at risk mitigation, alongside values alignment and impact evaluation, make up the main reasons investors embrace ESG approaches, according to Julie Koska, Morningstar’s director of project and product management for sustainability.

In a presentation for advisors, Koska outlined the research firm’s existing ESG tools and previewed several under development. The platform allows advisors to look at an array of so-called exclusions, such as gambling, abortion, military contracting, pornography, alcohol, fur, palm oil or weapons.

Other metrics look across a portfolio or evaluate a fund based on issues such as human rights, and gender and diversity. The carbon score, for example, comes from more than 70 indicators, and about 6,500 of 30,000 funds, roughly 20%, show up as well-aligned to a low-carbon economy, Koska said.

Morningstar CEO Kunal Kapoor
Morningstar CEO Kunal Kapoor addressed the firm's 2018 Investment Conference. (Photo by Jim Tweedie, Wyckoff-Tweedie Photography) Photo by Jim Tweedie, Wyckoff-Tweedie Photography

In October, Morningstar and the Money Management Institute will launch the first of two online courses for advisors on ESG strategies. The resources will also include workshops and forums for “knowledge and practical applications to engage with clients about sustainable investing,” Morningstar says.

Large asset managers, sovereign wealth funds and pension funds led the initial growth in ESG investments, says Sustainalytics CEO Michael Jantzi. These days, though, clients are “absolutely driving the market” in the U.S., he said in the panel with Van Liew at the conference.

“Looking at these issues is just smart investing. It should be part of your process,” Jantzi said. “But they’re also now more interested in the impact that their portfolio is having on the societies in which they live and on the environment.”

In the past year and a half, all new business to the Chicago office of Morgan’s Graystone Consulting, where Van Liew is a managing director, came to the practice at least in part due to the office’s expertise in the ESG field, she says. Women and millennial clients especially take to it, Van Liew says.

“They are seeking a different conversation with their advisor, and it has created an incredibly attractive opportunity for advisors who have pivoted to this area because you sound very, very different when you walk into the room,” she says.

“A millennial thinks a lot about the world and making a difference,” Van Liew added. “It affects their decisions about who they work for, it affects what they eat, it affects where they shop. To think that it’s not going to affect their selection of an investment advisor is just naïve.”