When Catherine Chen (left) was an investment banker 20 years ago, she recalls thinking, “All I’m doing is sitting here making rich companies richer. There’s got to be more to life than this.”
Chen wanted to deploy her talents and business acumen toward work that filled her soul and allowed her to make a positive impact on the world. So she launched a career as a financial advisor focused on driving environmental and social impact through the capital markets. “Investments are just another aspect of how we reflect ourselves,” says Chen, a financial advisor with RBC Wealth Management in San Francisco. “We buy certain products because of our values. We vote because of our values. Why shouldn’t we invest our savings—our number one financial asset—based on our values?”
The events of the last year—from the pandemic to the movement for racial justice to extreme weather events—compelled more clients to ask tough questions about the environmental, social and governance (ESG) practices of the companies where they invest their assets. For female advisors at RBC who have focused on ESG investing as a core piece of their business, these conversations are the foundation of strong relationships they’ve built with clients, as it helps put their beliefs into practice.
The topic is now top of mind for most corporate leaders, too. Prior to the pandemic, some in the industry dismissed the embrace of ESG as a marketing gimmick. But investments in mutual funds focused on sustainability have increased, and investors have increasingly moved toward companies operating with an eye on climate change. Earlier this year, Laurence D. Fink, head of BlackRock, the world’s largest investment manager, called on companies to detail how their business model will be compatible with limiting global warming and eliminating net greenhouse gas emissions by 2050.
“I’m so passionate about it because this is, in my view, the only way to invest,” says Chen, whose business is 100 percent focused on ESG and impact investing. “I believe that the financial markets have an ability to effect change a lot more quickly than legal or policy avenues.”
Women fuel interest in ESG
Responsible investing is growing rapidly in the U.S., from $12 trillion at the start of 2018 to $17.1 trillion at the start of 2020, a 42 percent increase, according to a report from the Forum for Sustainable and Responsible Investment. That means $1 of every $3 of U.S. assets under professional management is invested in ESG.
In 2019, RBC launched three model portfolios focused on ESG investing that immediately drew great interest from women advisors. Nearly one-third of the advisors with client assets in those three ESG portfolios are women, and as of February, 55 percent of the clients invested in them are women.
There was a “groundswell” of interest in ESG over the last year, says Kent McClanahan (left), vice president of Responsible Investing at RBC Wealth Management-U.S. in Minneapolis. The firm had already been building up expertise on responsible investing when it saw some early interest among clients, he says, and that focus also aligned with RBC’s own philosophies on diversity and environmental impact. “Our purpose is to help communities thrive and clients prosper,” he says. “So it fits right in all of those pieces that we as a firm believe in.”
Until more recently, the S in ESG—which stands for social—was an afterthought for some investors and companies, McClanahan says. Concerns like climate change, oil and plastics typically led most conversations about responsible investing, but now there’s increased interest in how companies treat employees and interact with the communities around them. “Last year, we saw a record amount of issuance of what are called social bonds,” he says. Those are bonds corporations or governments can issue to fund projects like affordable housing or those with other social benefits.
Also, Nasdaq proposed new listing rules late last year for companies on its exchange that would require them to disclose information annually about the diversity of their boards and have at least two diverse directors or else provide an explanation why they do not.
Responsible investing is most popular among Millennials, followed by women, according to a 2021 Cerulli Edge report. “Younger people get it intuitively, because they understand everything is related and that investing is not just ‘OK, we’re going to make a ton of money and forget about everything else,’” Chen says. “You can’t let externalities fly off all the products and services that you use, or there will be big problems down the road.”
Two-thirds of women believe they have more opportunity to tackle societal issues through impact investing, compared with 56 percent of men, according to a study of high-net-worth women and men conducted by The Economist Intelligence Unit, sponsored by RBC Wealth Management.
Myth busting: ESG doesn't mean losing returns
Chen, who does the bulk of her business with nonprofits and foundations, says that at first it was difficult to convince boards that an ESG-focused investment approach was the way to go. She made economic arguments, but still ran into responses like, “I’ve heard that you can never make money being a tree hugger.”
So Chen explained then, as she does now, that her arguments had nothing to do with hugging trees. “It’s a way of putting things together, understanding what you’re really owning and thinking about the longer-term impact,” she says. “Anyone can focus on quarterly results. To be successful, we’ve got to look for other trends that lie behind the numbers.”
That includes looking at how companies treat their employees—those that view them as assets have higher returns on investment. “Happy employees stay,” Chen says. “And when happy employees stay, they prevent the company from going through constant turnover, which is a very disruptive process in any company, which can lead to a big drain on productivity and therefore a big drain on the numbers.”
Patricia Baum (left), a financial advisor at RBC Wealth Management in Annapolis, Maryland, remembers the days when some people in her office would roll their eyes when she asked visiting wholesalers about ESG investing. Most of them thought it solely meant renewable energy. “It’s not about buying wind farms,” says Baum, who has been with RBC since 1998. “It’s about finding really great, fundamentally sound companies that look at investment risk.”
Even clients who are interested in investing in their values will come to those conversations with similar misconceptions and express concerns about higher costs and sacrificing returns, she says. She takes that opportunity to talk about the resilience of ESG investing, especially during the downturns the markets saw at the start of the pandemic last year.
Baum says extreme weather has forced companies to examine the risks that climate change brings to their business models, and clients are increasingly understanding the importance of evaluating that in investment decisions. “Climate risk is investment risk,” she says. “If companies are not looking out 10, 15, 20 years in terms of their risk with regard to climate change, why would you want to invest in them?”
Ann Marie Etergino (left), a financial advisor in Chevy Chase, Maryland, who has been with RBC since 2001, found a way to have a climate change conversation with a client who explicitly said he wasn’t interested in talking about the subject. When she asked if he was interested in investing in high-growth, profit-able companies, he said yes. That was her opportunity to point out that “companies that don't consider the risks of climate change can have enormous hits to their bottom line, and that hurts their profitability.”
And for skeptical clients, advisors can point to any number of studies that show you don’t have to give up performance with ESG investing. “If you’re still saying that you have to give up returns, you just aren’t paying attention at this point,” McClanahan says.
Putting beliefs into practice
The first step to educating clients about responsible investing is to have genuine conversations. “We can get technical and sophisticated. But when it’s time to make a decision, it all comes down to values-based investing— is the investment or strategy aligned with the client’s personal goals and principles?” Etergino says. “If we take a step back, what separates a financial advisor from a wealth manager is having deep relationships with your clients and knowing what’s important to them.”
And Etergino says it’s usually women who want to have those conversations. Now that COVID-19 has uncovered and reinforced inequities, with the impact of the pandemic falling disproportionately on women, these conversations can occur even more naturally. She recommends that advisors acknowledge their own fears and concerns about what’s happening in the world. “To be able to have those conversations, you have to be very authentic,” she says. “I think that’s the great advantage that women advisors have.”
In doing so, they can better understand their clients’ priorities and align their investments with what is most important to them, she says. This allows an advisor to go beyond a client’s basic financial goals and retirement planning to what they want their legacy to be.
“You’re not talking about portfolio performance or why did this mutual fund outperform that bond; you’re talking about those issues that are most important to your clients that reflect their deepest values,” Etergino says. “And once you start having those conversations, you have clients for life.”
A recent survey of RBC Wealth Management-U.S. clients found that women are almost twice as likely as men to say it is important that the companies they invest in integrate ESG factors into their policies. It also found that women are more likely to prioritize ESG impact when considering what companies or funds to invest in, while men are more likely to prioritize financial performance.
Baum got started 15 years ago when she began working with new clients—a husband and wife—and the woman wanted to make sure their investments didn’t include fossil fuels, big banks or private prisons, a practice called negative screening, which predated ESG investing. She attended conferences on the subject and did a wealth of research to learn more about how to construct portfolios that reflected her clients’ values. Baum also took inspiration from her daughter, who works as an investment strategist for a nonprofit firm that is a leader in sustainable investment practices.
Baum now brings up ESG investing with every client. “Climate is obviously near the top of a lot of people’s lists, but it’s more than that,” she says. “You have to drill down and find out what a client’s personal approach is.”
The process has evolved from negative screening, she says. Some clients care about racial equity and diversity, employees being treated fairly or companies that are engaged with their communities. Today, there is more data available to help guide those decisions. “A lot of these fund managers that are on our platform are actually activists and are helping shape public policy,” Baum says. She adds that RBC has a lot of resources available for advisors who want to get started. “There’s so much more product or strategy than we ever had before.”
Baum says 2020 dramatically changed demand with the pandemic and events that sparked efforts to confront systemic racism. “Companies and foundations really reevaluated their purpose and are putting their beliefs into practice,” she says. “So I think a lot of investors are doubling down on their commitment.”
In the past, investors would focus on making money and then using their wealth to make grants or philanthropic gifts later in life or after their death. “I really think those days are over,” Baum says. “The power of capital markets and the power of the assets can make a bigger difference to the world if we use those assets to align with our values.”
Take a look behind the scenes at the culture, leadership and day-to-day life at RBC Wealth Management in our latest issue of Prosper•US magazine. Designed for women who advise, plan, spend, save and give, this RBC publication is full of inspiration and practical tips for women in the industry. Read the Spring 2021 edition.