For many advisers, environmental, social and governance investing can present a dilemma.
“It makes clients feel better to be in socially responsible funds, but it’s not necessarily in their best financial interest,” says CFP Maria Cornelius, executive vice president of Burt Wealth Advisors in Rockville, Md.
Her firm’s experience over the past decade and a half has been that clients’ ESG funds have regularly underperformed the S&P 500 or mid-cap funds.
One of Cornelius’ clients believed so strongly in ESG investing that she deliberately stayed the course for many years, despite lower returns.
“The only reason we were in them is because that’s what she wanted,” Cornelius says.
Cornelius doesn’t think that it makes sense for clients to take a lower rate of return on retirement portfolios because they want to be socially conscious.
“It’s sort of unfortunate,” she says. “I feel bad telling people that.”
Instead, Cornelius recommends that clients use money from regular funds to contribute to causes and charities they care about, or limit their impact investing to smaller amounts.
Still, advisers must realize that clients have differing opinions about social impact and that it is an important area to discuss fully, she says.
Cornelius herself holds a fund that requires all companies in its portfolio to have at least two women directors on their boards.
“I agree with that, and I understand the strategy,” she says. “But it hasn’t been successful.”
ESG approaches cut down on investment options, and that either reduces return or increases risk, says CFP Christopher Cordaro.
All the more reason that advisers need to be conversant with ESG issues, says Cordaro, managing partner, chief investment officer and wealth adviser at RegentAtlantic Capital in Morristown, N.J.
“If a client brings it up, they’re bringing it up because they want to do something good with their money,” he says. “If you’re just dismissing it, you’re really doing the client a disservice, and you’re probably not going to keep that client for very long.”
The key is to clarify what the client really cares about.
Cordaro cites the case of one new client, a widow without any investment experience but with a substantial amount of cash, who said that she was interested in sustainability.
When Cordaro suggested that she invest in solar-energy stocks, the client quickly agreed.
But when he followed up by asking whether she wanted solar stocks to be heavily weighted in her portfolio, she said no, that a small amount was enough.
“She didn’t really want an ESG mandate, she just wanted to feel good about a stock or two that was going to end up in her portfolio,” Cordaro says.
“It’s not going to put her at risk, but, wow, it really got her to feel good about what she was doing,” he says. “It got someone who was not engaged to be more engaged, because now they’re interested in how that solar stock does.”
This story is part of a 30-30 series on ways to build a better portfolio.