What might have been an investment priority for your oldest clients might not be the same as the child or grandchild to whom wealth will need to be passed down.
Questions about investment sustainability and the shift towards investments with good environmental, social and governance are becoming more common among younger clients as the balance of wealth starts to shift down the generations.
So how important is ESG when it comes to intergenerational wealth planning? Gabriela Herculano is founder and chief executive of iClima, a minority, female-led green FinTech firm focused on redefining climate change investments.
She speaks to FTAdviser In Focus about the need to rethink investment sustainability, especially when it comes to younger investors.
FTAdviser: Can a 20-year old wanting to start saving for retirement afford not to invest along ESG principles?
Gabriela Herculano: A young investor will take on substantial risk if they are not investing based on the principle that the world is transitioning towards sustainability. We think the current transition is dramatic, and we refer to it as a seismic shift.
It is deep, profound and will certainly shake things up. The world in 2030 will be a very different one. If you invest in the companies that are in line with business as usual, you will be taking very serious long-term risks.
ESG scores are still a black box, and different data providers calculate the scores in different ways which can result in different ratings.We have observed a recent rotation to value, and energy companies such as Marathon Oil are some of the best performing S&P500 stocks this year.
But they face so many risks, from carbon taxing risks to stranded assets risks. Long-term portfolio exposure to these equities could tack on significant risk.
FTA: How can advisers bring ESG to the fore for clients of all ages, not just the young?
GH: Finance is about identifying, quantifying and mitigating risk. Companies that are not sustainable or that sell products that are not innovative pose material risks to portfolios.
We think ESG is broadening. Europe has taken the lead and embraced the concept, and we believe that the US is following suit. The market will demand more differentiation, discrimination and ESG will become more transparent over time.
Good advisers can help clients look under the hood, quantify risk, build portfolios that are robust and in line with change.
FTA: How can technology help to bridge the wealth/education gap, whereby the young might be clued up on ESG but don’t have the wealth to invest, whereas the older folk have the wealth, but not perhaps the ESG knowledge?
GH: Technology allows the dissemination of information to happen at a much higher volume and at a much faster rate than ever before.
From social media platforms that enable investors to exchange ideas (like Reddit) to investing platforms that allow fractional shares to be purchased with zero commission (like Robinhood), innovation is happening all around.
We always ask to see the ratings for companies such as Tesla, and it is shocking to see the standard deviation in the responses.With investors more connected, ideas are spreading and proliferating outside traditional institutions, across generations and geographies like never before.
FTA: How has greenwashing become such a problem when it comes to assessing a company's ethical credentials?
GH: More and more investors are embracing the idea of sustainability while more and more portfolio managers believe that companies with strong sustainable attributes can outperform the market.
Unfortunately, the competition for AUM has resulted in more financial products and fund issuers falsely portraying their operations, equities and funds as sustainable.
The lack of 1) tangible metrics and 2) a consensus on the calculation of ESG scores enable different players to come up with ways to portray specific companies in a particular way that may disregard some important ESG aspects.
At iClima, we like to say that the best way to combat greenwashing is with data.
FTA: I understand you believe a consistent framework to monitor ESG factors could reign in the ability for greenwashing. Does such a thing exist - or are advisers and clients often left trying to make sense of a host of data?
GH: It can be done. We advocate for the use of very tangible metrics. In the case of ETFs, we think that each fund must state 1) their purpose, 2) the key metric of impact, and 3) what it maximises and minimises.
Our flagship fund, the iClima Global Decarbonization Transition Leaders has a clear and single focus which is to represent the companies that can enable potential avoided emissions. Our metric is annual Gigatons of Potential Avoided Emissions in CO2e. We maximise green revenue, while negatively screen for brown revenue.
FTA: Could you explain the difference between green and brown revenue? How can customers/the average investor understand which is which?
Green revenue is derived from the sale of products and services that can be deemed to be environmentally sustainable.
In other words, the solutions that allow us to live our lives – heat our homes, move from point A to point B, eat, communicate, etc – especially with EVs, renewable energy, telepresence, plant based burgers) but do so with a much lower carbon footprint or even zero emissions.
These solutions move us away from BAU, predicated on fossil fuel-based solutions. Brown revenues are the revenues associated with BAU, such as internal combustion engines, gas fired or coal fired power plants, airplanes, beef burgers, to name a few.
FTA: We all know we need to reduce emissions but how do we really achieve net zero - or even negative emissions across the whole supply chain?
GH: The companies in our universe are the suppliers of the solutions. The way to achieve net zero, or the way for the companies and individuals to reduce their own emissions is by embracing the green solutions available.
Possible solutions include: converting energy sources to 100 per cent renewable; renewing your fleet to 100 per cent electric vehicles; improving building insulation; using and storing distributed renewable energy; embracing telepresence and reducing corporate travel based on planes; using electric trains or transport whenever possible, etc.
FTA: Why do companies scoring highly on ESG metrics (all of the E, S and G!) make for good, sustainable long-term investments?
GH: It is important to be careful with ESG scores. They are still a black box and different data providers calculate the scores in different ways which can result in different ratings.
We always ask to see the ratings for companies such as Tesla, and it is shocking to see the standard deviation in the responses. We believe a company’s course of free cash flow (in other words, their revenue) is the key point to make the fundamental point of what a company does, and not just how the company operates.
A top-five ESG-rated FTSE name is a global tobacco company. This company produces cigarettes, it may do it in more sustainable ways, but cigarettes in our view are not in line with sustainable development goals.
Companies that are innovating to solve more pressing needs (for example: mitigation of climate change, bending our linear economy towards a circular one) and that do that by operating with robust ESG ways are very likely to be sustainable, relevant long term investments.
FTA: What do existing companies with low ESG scores and high ESG risk need to do to remain viable businesses?
GH: They need to innovate. They need to make sure that they are relevant. Relevance is connected with the ability to problem solve. Be in line with what will make the planet survive, regenerate.
Look at their operations and see how to produce (cost of goods sold) and sell (SG&A) in more sustainable ways. Moreover, put pressure on their suppliers to do so.
simoney.kyriakou@ft.com
