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Fulfilling Clients’ Personal ESG Requests with the Power of Direct Indexing

By Andrew Gradus, Senior Director, Consulting

direct-indexing-esg

Clients today are more informed and more particular about their personal investments than ever before, and they are letting advisors know about their investment preferences. This heightened awareness, especially regarding ESG investing criteria, provides advisors with an enormous opportunity to more personally address and satisfy their clients’ requests with a custom-tailored portfolio solution. Great news… right? For most advisors, the answer is — maybe!

The linchpin to receiving an emphatic yes from advisors is having a reliable, cost-effective and defensible way to construct and manage custom-tailored portfolios against complex ESG investor preferences. And do all that while maintaining a correlation to a given objective, benchmark, and stated risk profile.

Enter Adhesion’s Direct Indexing capabilities — one of the industry’s solutions for creating better client relationships by efficiently addressing client investing preference. Currently, ESG investing, which stands for environmental, social & governance, is used as an umbrella term to capture the many values and preferences that clients can hold that would influence their investment decisions. As the number of customized requests from clients continues to increase, advisors can either address them or run the risk of losing existing relationships and missing out on new growth opportunities.

In this blog, we cover five of the most popular ESG demands that clients are making and how direct indexing can provide the flexibility and customizability necessary to meet them.

The Most Common Client ESG Requests Today

Weapons

Weaponry is a contentious issue, particularly in the United States, and the range of client demands related to weaponry varies. The most common demand, however, is divestment from any company that finances international armed conflicts by participating in the sale or distribution of weapons. According to the Stockholm International Peace Research Institute, companies such as Lockheed Martin, Boeing, Northrop Grumman, Raytheon and General Dynamics registered $166 billion in annual arms sales in 2019.

Carbon Footprint

While some clients stop at excluding oil and gas producing companies from their investment portfolios, the most environmentally minded clients may ask to invest specifically in companies that are committed to lowering their environmental impact. A number of low-carbon funds have been launched in the past few years due to the increase in demand, such as AllianceBernstein’s Green Managed Volatility Equities fund. However, advisors may struggle with constructing a low carbon portfolio outside of the handful of funds that exist whilst simultaneously meeting their clients’ performance objectives.

Gender and Diversity

Gender and diversity, particularly as it relates to board composition, is a very common client request, and unfortunately can be a difficult one to satisfy. The most common request is to divest from any companies that have not achieved a high degree of gender diversity in leadership positions or that do not champion racial diversity within its ranks.

Biblically Responsible Investing

While technically not the same as ESG, Biblically Responsible Investing (BRI) or Values Based Investing is a common client request. Clients who wish to avoid companies involved in adult entertainment, contraceptives, embryonic stem cell research, gambling, or a wide range of other business activities, have several options available to reflect their values. This is a category that can lead to a plethora of client requests. While there are a number of BRI funds, such as Inspire and Timothy Plan, designed for faith-based investors, advisors often find that values and requests may differ across religious groups.

Sustainable Products Involvement

Investors have historically focused on exclusionary criteria for their ESG portfolios. However, they can also take a more proactive approach to generate a positive impact with their investments. Examples include companies involved in affordable housing, renewable energy, financial inclusion, and sustainable agriculture. According to a study by Morgan Stanley, millennial investors are nearly twice as likely to invest in companies or funds that target specific social or environmental outcomes.

Meeting Your Clients’ Top Custom Requests Through Direct Indexing

As mentioned in previous blog posts, the current solutions available to advisors for socially-minded clients (namely exclusionary investing and ESG-themed managers) fail to deliver the customizability and scalability necessary to fulfill their wishes. If clients predominantly approach their advisor with only one of the requests detailed above, chances are high that the advisor would be able to either exclude certain stocks from their portfolios or find a fund that meets their requirements. However, it is rare for clients to have only one of the aforementioned demands at a time and advisors have many clients with ESG concerns.

Socially and environmentally conscious clients tend to have a number of values and requests that make it almost impossible for advisors to create a sound investment strategy that caters to their personal preferences in the absence of direct indexing. Adhesion’s Direct Indexing platform empowers advisors to address clients’ ESG demands and other personal investing preferences by giving them the ability to create an index strategy that can satisfy their clients’ collective ESG concerns.

What’s more, Adhesion Wealth’s indexing strategies offer the potential to experience better after-tax returns because investors own the stocks directly, so they can optimize a suite of tax-managed trading services that they normally wouldn't be able to with ETFs or mutual funds. With our single platform interface, advisors can quickly and easily reduce the trading and rebalancing burden, and possibly reduce tax expenses.

Conclusion

Powerful and flexible, our Direct Indexing solution allows advisors to efficiently satisfy clients’ investing preferences. Our platform empowers them with the ability to create and manage customized strategies that can satisfy their clients’ collective concerns and investing criteria, such as ESG, without compromising on cost or performance.


Want to learn more about Direct Indexes? Request a consultation with Adhesion Wealth today!

By Andrew Gradus, Senior Director, Consulting