Leader or laggard? Understanding the key role of investment advisors, bankers and family office staff in sustainable investing
Intermediaries are key nodes in financial markets. Research shows that, in particular, client relationship managers and family office staff play a critical role in either facilitating or limiting the ability of their (ultra) high net worth or (U)HNWI clients in bringing their sustainability interests to life. In our research at CSP, we’ve seen that some of these practitioners are making strides in mainstreaming sustainable investing, while others are lagging behind.
We ran a webinar to discuss just that: what role do investment advisors, bankers, and family office staff play in supporting their clients to realize their sustainability and impact goals? The webinar featured presentations from CSP’s Managing Director, Dr. Falko Paetzold, and Head of Wealth Manager Programs, Taeun Kwon. The webinar also included insights from Paolo Fresia, who is a member of Toniic 100, a global network of high-net worth, family office, and foundation asset owners committed to deploying 100% of their investments in at least one portfolio in pursuit of deeper positive net impact. Paolo is also the founder of 100% Sustainability, a family office dedicated to sustainable investing.
In his presentation, Dr. Falko Paetzold dove into the different narratives that bankers use when they speak about sustainability and how that influences whether or not their clients opt for sustainable investing strategies. Taeun looked at how to distinguish leaders from laggards as a client and tips on how to build the required capabilities as an intermediary. Paolo shared practitioner insights on what it takes to transform and build portfolios with a 100% sustainable approach.
The full discussion can be found below:
If you want to simply listen to us, tune in through Soundcloud:
Five highlights from the live Q&A.
1. What can I do if my advisor can’t support me in carrying out a sustainable investing strategy?
Paolo: It depends on which type of advisor you’re talking about. (a) If it’s either family office staff or a strategic consultant, then you have more freedom to change. There are a lot of resources now to find other players. There are currently a lot of newbies in the strategic consultant space, people that are only focusing on impact investing and sustainable finance. This means that it is relatively easy to switch teams and start working with people who are dedicated to the sole mission of sustainable investing. See the Toniic T100 report with insights from advisors and consultants. There is also a new start-up databaser offering contacts called Values Advisor.
If you’re referring to your wealth manager, then there are various strategies:
- Send them to CSP’s Sustainable Investing in Wealth Management course. The training gives a good overview of the basics of sustainable investing and also attunes wealth managers to a listening approach; instead of telling clients what to do, asking their clients what they want to do for the world.
- Show your existing wealth manager that the demand for sustainable investing is increasing and that it is not an add-on, but a must-have.
- Only hire firms specialized in impact investing or sustainable finance. This ensures that sustainability is integrated throughout the whole investment and strategy process from the beginning.
Falko: There are two perspectives:
- Your advisor can’t support you because they don’t have the capability to do so, i.e. access to the right products. In this case, one strategy is to carve out a portion of your assets and take that capital to a different firm, optimally a specialist. You can then bring that portfolio back to your original advisor to show how carrying out a sustainable investing strategy can be done.
- Your advisor doesn’t put sustainability high enough on their priority list. One way to approach this is to bring in an independent consultant or advisor to a meeting with your advisor to have someone on your side help explain how this can be done. This strategy has been highly successful for some of our alumni. Further contacts can be found at ImpactDatabase.eu.
For more information, you can also have a look at the report Ten arguments and practical tools for client advisors.
2. The presenters mentioned that an in-house sustainability team or expert is a good sign, but couldn’t that also be a sign of “marketing” and greenwashing?
Falko: If you want to be able to tell if the firm is greenwashing or not, then talk to the team. Get the internal sustainability experts to come into your client meeting to test them and get to the bottom of what they mean with sustainable investing. In our programs, we give wealth owners a list of “tough questions” to probe their advisors. If the advisors can answer those questions, then that is a sign of the advisors being on top of the game. You can also look at the questionnaire for wealth owners to use that we include in the back of our report on the sustainable investing capabilities of European Private Banks.
Taeun: Where does this team sit internally? If it’s in risk and compliance, then it doesn’t mean much and they may just be greenwashing, but if it sits within the investment team and CIO office, then it’s a very positive sign.
3. How do I tell the different types of advisors apart? Should I decentralize or centralize decision-making and strategy development?
Paolo: There are three main types of advisors: strategy consultants, wealth managers, and asset managers (the ones who actually invest the money). Interview them to make sure they’re a fit for you, but make sure you also find clarity in what you need. There’s all sorts of types of support you might need: administration, tax, legal, strategy, advisory, due diligence, and implementation. I decentralized and went for specialists. People who claim that they are a jack of all trades and can do it all are not really able to.
My approach includes the following:
- a custodian bank with reasonable fees for custody;
- strategy-independent advisors;
- for liquid assets, two separate wealth managers with no in-house products, but who only select third-party products because they value independence;
- and for private asset classes, specialist investment advisors for each of the specific asset classes within private investments.
Taeun: Of course you can also try to influence your existing advisor. One example is an investor who took the approach of engaging with their wealth manager not specialized in sustainable investing. This allowed the investor to move the “giant” or the organization as a whole toward sustainable investing products. This also allowed the sustainable products to be available for other clients. This is a way to have an impact, without having to change advisors. One method to get this done in practice is voting and engaging.
4. Has your research shown which business model for private banks, i.e. organizational structure and compensation of client advisors, is empowering rather than hindering qualified client advisors to support their client’s impact investment needs?
Taeun: Things that drive bank to support good client advisors are (1) when there’s a business case, like to get more clients and by having a business model built on having specialist players as a differentiator; or (2) having top management support, which is one of the strongest drivers and can shift entire bank within 2–3 years.
What’s also interesting are the things that hinder a bank from supporting their client’s impact investment needs. They include (1) having no business case, (2) and having top management that is not supportive. Very interesting is the case when (3) a bank is an early-mover in sustainable investing but has become complacent. This is more of a hindrance than anything else, where banks essentially become laggards after having been in the leader position.
Paolo: It’s especially important that the bank has a good legal department that gets this!
Additional Q&A
What should you expect from advisors in terms of ongoing reporting of the financial, and ESG and impact performance of investments?
At the very least, advisors should be able to provide you with basic ESG information such as the carbon footprint of your portfolio and the generic ESG performance of your portfolio. The best advisors are the ones who can map your portfolio against the 17 UN Sustainable Development Goals, which entails not just looking at ESG factors — i.e. how a company is managed — but directly at companies’ impact footprints in terms of their products and services. Furthermore, the approach maps your portfolio in the Impact Management Project Matrix, which entails rating investments on both the negative and positive impact of the underlying enterprises, as well as on the investor contribution and additionality. That is the impact of your specific investment on a given company.
Can tools or software solutions support advisors to better advise in sustainable strategies?
Absolutely, technology and availability of robust ESG and impact data will be key to providing suitable advice. They range from standard ESG data providers, such as Sustainalytics, MSCI, Morningstar, RobecoSAM, to more specialized firms measuring the impact footprint of the products and services of companies, such as ImpactCubed.
Moreover, there are increasing efforts to create impact databases for impact investments, such as the Imp+Act Alliance, Toniic Tracer, and Align 17. Some of these are free and others require users to pay or be part of membership organizations.
The best advisors are the ones that survey the range of tools and platforms available and invest in both getting third party data, as well as in developing their own proprietary frameworks. This approach enables granular analysis including mapping a client’s investments to their preferred target SDGs.
What are your thoughts about the duration of advisory relationships? Long term and continuous or short term for specific projects?
For a strategic advisor the relationship should ideally be long term. However, To provide consultancy on specialist projects or due diligence, it is good to avoid a “jack of all trades”, and retain a short term advisor for such specific consultancy. As per investments, the ideal situation is to have a portfolio of advisors: specialized consultants, strategic independent advisors, outsourced Chief Investment Officers, wealth managers, custodians, asset managers, and other specialists such as tax and legal experts.
Do you think advisors or sales people should be rated online? Somehow like Tripadvisor?
Currently, such recommendations are given personally in wealth owner communities such as toniic, The ImPact, PYMWYMIC, and amongst the alumni of the CSP programs. There is a start-up platform piloting this service with several networks so that private investors can find suitable advisors to help them with sustainable investing.
On one hand, a rating could help find the best service, as with any other service. On the other hand, there is a very personal aspect about finding the right advisor. It has to be a fit for the services they offer, but also from a more individual perspective, like if their values are a match with yours, or if you can click with them on a personal level. Even if they’re highly rated, it doesn’t mean that they will be a match for you. However, an online rating may help investors narrow down their options based on others’ experiences.
Will sustainable investing be sooner or later regulated?
Yes. Perhaps the most prominent example of this that’s happening right now is the EU Action Plan on Financing Sustainable Growth. Although EU regulation doesn’t apply to Switzerland, many banks are preparing for it due to the fact that they do cross-border business. Some components of it include:
- Creating a taxonomy for sustainable investments. The intention of this to have a unified classification system for what counts as a sustainable investment and how it is categorized.
- Establishing labels for green financial products.
- Mandatory integration of clients’ ESG preferences when providing financial advice.
- Increase integration of sustainability risks and impacts into investment decision-making processes.
Does CSP provide bespoke consulting to assist corporates or investment managers in increasing their investment strategy along with the learner to leader continuum?
CSP offers in-house versions of the Sustainable Investing in Wealth Management program for advisors to help with the service side of the investment firm move from learner to leader. Additionally, we have also started working with family offices and investment managers to improve their sustainable investing strategy. Among the criteria that we use to choose our projects is potential impact — if we see an opportunity for high impact in an organization or group, then we are more likely to take on that project.
Will your 2-day wealth manager training take place in Zurich?
Yes! The next Sustainable Investing in Wealth Management program takes place in June 4–5. It also brings in wealth owners to share their perspective and experience. The second iteration will be in November. We are currently building up our online training skills so that we are able to run the program with the planned schedule despite the current situation with COVID-19.
For more information, please contact Erin from CSP. Erin is in charge of the webinars and partnership-building and you can catch her via erin.duddy@bf.uzh.ch.
Upcoming webinars
March 26th at 16:00–17:00 CET
Britta Gruenig Castelli, Carsten Hjelde: Three barriers to impact investing: How to overcome them along the investor journey.
Register here to participate in Britta’s session.
April 2nd at 15:00–16:00 CET
Taeun Kwon: Blended Finance & mobilizing private capital for impact.
Register here to participate in Taeun’s session.
April 8th at 16:00–17:00 CET
Britta Gruenig Castelli, Sam Bonsey: From futures and values to mandates and investment strategies.
Register here to participate in Britta’s session
May 14th at 10:00–11:00 CET
Dr. Julian Kölbel & Florian Heeb: Changing the world as an investor — what to do and what not to do.
June 16th at 10:00–11:00 CET
Taeun Kwon: Faith-based investors and impact investing.
- Schedule subject to slight changes.
The webinars are brought to you with the support of EIT Climate KIC and FC4S. Warm thank you for the collaboration!
