How to Guide a Conversation Around Sustainable Investing

Climate change; racial and gender diversity; stakeholder capitalism—several years ago, investment advisors might have been surprised to hear these terms come up in conversations with clients. Today, they’re discussed as frequently as risk and return. Though it’s been around for decades, interest in sustainable investing has exploded over the past five years. Investors have grown increasingly comfortable with the evidence that integrating environmental, social and governance (ESG) factors into the investment process doesn’t require sacrificing investment performance. In fact, many in the investment industry would argue that ESG analysis can enhance risk-adjusted returns.

Aligning Family Values

Building a diversified, sustainable investment portfolio can seem daunting. Eager to deploy capital, investors risk getting pulled in different directions as they try to maximize their impact, keep their portfolios aligned with their values and achieve their investment objectives. The challenge is often compounded for owners of family businesses, whose wealth is often concentrated in a single asset. Diversification may be prudent, but few owners are eager to loosen the connection to the source of their family’s success.

Equipped with the right tools, advisors are in an excellent position to help families strike the right balance among these often-conflicting objectives. Investment advisors are already familiar with the process of developing an investment policy statement (IPS) to guide the pursuit of investment returns, while respecting constraints like risk tolerance and liquidity needs. We believe a similar process is needed when helping clients clarify and operationalize their sustainability objectives. Drafting a sustainability strategy statement to sit alongside the IPS helps ensure the portfolio reflects the family’s values and can facilitate a much deeper engagement with the advisor.

Here are prompts advisors can use to help families articulate their sustainable investing goals.

The Social Conversation

The desire to incorporate sustainable investing can come from younger generations within the family, but it can also come from senior generations or a combination of both. Family business clients should evaluate the opportunities and take stock of their resources. They must identify the social and environmental issues that are important to the family and consider the resources they have available to address them.

Statement of Purpose

The Statement of Purpose SOP should succinctly capture clients’ long-term alignment and impact objectives. It also offers the opportunity to clarify the balance that should be maintained between the pursuit of social and financial returns.

Guiding Principles and Beliefs

The family’s principles and beliefs provide the “rules of the road” for portfolio implementation. Few key areas to consider:

• Impact-first investing. What types of trade-offs are the family willing and unwilling to make to further its goals? Is there a role for “concessionary capital” in the portfolio?
• Negative screens. Are there sectors or companies the family wants to avoid? Are there particular business activities, such as predatory lending, that should be kept out of the portfolio? How comfortable would the family be if their portfolio underperformed the benchmark because of a negative screen?
• ESG benefits. What benefits does the family hope to realize from including ESG investments in its portfolio: values alignment, investment performance or a combination of both?
• Emerging managers. Small, upstart investment managers feature prominently in the sustainable investing market, and they often offer the only means of gaining exposure to specific impact themes.

Measurable Objectives

Establishing near-term objectives that are both actionable and measurable helps set the portfolio on a path towards success. While it may be tempting to set specific investment targets, allow for flexibility. Objectives that commit to learning more about particular issues or simply sourcing opportunities from a particular market may be the most appropriate, especially if clients are just beginning to explore sustainable investing.

Among the more common objectives sustainable investors consider is to set a target allocation to sustainable investments. That may be appropriate for some investors, but it’s not the only allocation strategy available.

Key Planning Considerations

Some investors find their sustainability planning efforts evolve over time. That’s why it’s important for clients to stay flexible and think strategically about the positioning of their portfolio before they get started. Focus on developing a plan that can grow with your client’s family as perspective changes over time. Consider emphasizing process rather than outcome to maximize flexibility.

About Franklin Templeton

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 155 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers boutique specialization on a global scale, bringing extensive capabilities in equity, fixed income, multi-asset solutions and alternatives. With offices in more than 30 countries and approximately 1,300 investment professionals, the California-based company has 75 years of investment experience and approximately $1.5 trillion in assets under management as of January 31, 2022. For more information, please visit franklintempleton.com and follow us on LinkedIn, Twitter and Facebook.