Committed to Sustainable Investing? Three Questions to Ask Your Adviser

As sustainable, responsible and impact investing (SRI) continues to gain popularity, more investors have questions and are curious to see if it's right for them.

According to US SIF, the Sustainable Investment Forum, about $8.4 trillion is invested using sustainable investing strategies in the U.S. — that’s equivalent to one out of every eight professionally managed dollars.

Despite some of the negative politics leveled at responsible investing, using ESG (environmental, social and governance) metrics to construct a portfolio is simply a good practice. As a fiduciary, it’s important for me to know as much about a potential investment as possible, and ESG metrics are just as important as traditional, fundamental measurements.

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It's critical to keep in mind there is a difference between ESG and sustainable investing. ESG is simply the metrics — it’s the data that helps your adviser make a decision about your investments. Sustainable investing is the final portfolio. Some investment managers will try to create a portfolio by layering ESG risk metrics over a traditional index such as the S&P 500. While this may have a better outcome than the original portfolio, it still usually includes fossil fuel companies and other non-sustainable companies.

A truly sustainable investment portfolio is built with intention, asking the question, “What kinds of companies are going to make the world a more sustainable and resilient place?” It’s a new way of thinking for a new economy.

I like to describe the difference like this: An ESG index that reduces its exposure to ExxonMobil is “less bad.” A portfolio that eliminates the company is better. But a portfolio that replaces it with First Solar is sustainable.

With all of that in mind, here are three key questions that you should ask your financial adviser about responsible investing:

1. How much experience do you have with sustainable investing?

The practice has been around for decades, but only a select few advisers have specialized in it. Brokerage houses of all sizes have added ESG portfolios to their investment options, but not all of their advisers have taken the opportunity to educate themselves on the ins and outs of SRI. Look for advisers with the CSRIC designation, which means they are a Chartered SRI counselor and completed a course on the topic.

2. How will you avoid greenwashing and create an intentional sustainable portfolio?

All too often, the ESG portfolios that brokerages put together include greenwashed ESG index funds, or ESG funds that are not sustainable. As described above, these portfolios are simply less bad versions of traditional stock indexes. I’ve found that most individual investors are interested in a solutions-based portfolio — one that truly reflects their personal values. An impersonal ESG index fund likely won’t meet your priorities. It’s just as important to understand what companies the adviser is removing from and adding to your portfolio.

3. Do you use outside managers?

A great way to eliminate the oftentimes proprietary investment recommendations proposed is for an adviser to use an outside expert SRI portfolio manager. These are often termed SMAs, or separately managed accounts. Your adviser basically contracts with the outside expert portfolio manager to oversee the investments for you while the adviser continues to manage the relationship. It’s the best of both worlds!

When you choose to invest with your values, it may make for an uncomfortable conversation with your current or prospective adviser. But it’s important that you not be shy about asking the tough questions — you don’t want to get a year or two into the relationship only to find out that your investments include ExxonMobil and DuPont (which is entirely possible with some “less bad” ESG index portfolios).

These three questions are just a guide to get you started becoming a more responsible investor. There are many more questions to ask depending on your personal situation, values and goals. Make a list before your meeting, and don’t be afraid to say “next” and move on to another expert if your adviser doesn’t understand how to craft a sustainable portfolio that aligns with your values.