Increasingly, clients want to make a difference with their dollars, or at least know that their hard-earned money won't support companies or industries they are morally opposed to. But advisors are still dragging their feet on having these conversations with investors—to their own detriment, says Sonya Dreizler, CEO of Solutions With Sonya.
A 15-year financial industry veteran, Sonya Dreizler helps firms plan and roll out environment, social and governance (ESG) investing, socially responsible investing (SRI) and impact investing solutions. Her clients include financial planners and advisors, institutions, broker-dealers, fund companies and more.
At the upcoming Inside Fixed Income conference held Nov. 12-13 in San Diego, Dreizler will be giving a keynote speech titled, "The Future Is Sustainable Investing, But What Does It Mean for Fixed Income Practitioners?" Recently we spoke with her to get a preview of her talk and discuss some of the broad trends in the ESG space.
ETF.com: Would you preview a little of what you'll be discussing in your talk?
Sonya Dreizler: First, I like to set the stage when I'm talking about impact and values-aligned investing, just to make sure that we're all speaking the same language. There's a ton of terminology out there, and it's used interchangeably—ESG, impact, SRI —but they do mean different things.
My decoder ring key is that "ESG" equals data; "SRI" equals values; "impact" equals intention. The word "sustainable" is kind of a mixed bag; it can be any combination of the above terms.
So ESG is the environmental, social and governance data about a company. That does not necessarily translate to values, because different money managers and investors do different things with that data. They might create a values-based portfolio or fund with it; or they could create a best-in-breed index.
For example, you could have an ESG fund that has Exxon in it, because of the way ESG data is used. Maybe the manager is looking for a company that invests a lot—not as percentage of business, but a lot of dollars into renewable energy. Exxon is one of them, so Exxon could be just a best-in-breed company. But that can end up with a really uncomfortable conversation later, if a client comes in and says, "I thought I had an environmental portfolio; I don't want fossil fuels in my portfolio."
ETF.com: On the flip side, too: A values-based investment might miss out on some of the best-in-breed stocks.
Dreizler: That's also true. Usually, when you see "SRI," it means the fund manager or investment professional is looking to align the portfolio with a specific value set. Those values could be environmental, or they could be looking for companies that do well by their local community or have more women in leadership positions relative to their peers.
Meanwhile, impact is intention: so, buying a company or lending to a company where impact is baked into the mission of the company, and there is some intent there to have a positive social, environmental impact.
The important thing to know is that, as a professional, you have to look under the hood and understand the holdings—both what the holdings are and what the intention of the manager is—so that you can set expectations for the client and there are no surprises.
ETF.com: Let's get more specific about fixed income. What options are there for ESG investments in the fixed income space?
Dreizler: The obvious ones are green bonds and munis [municipal bonds], but there are some other ones too, like Treasuries.
ETF.com: How do Treasuries fit into an ESG perspective?
Dreizler: They seem pretty vanilla, right? You can put Treasuries in almost anything. But some clients don't want Treasuries because how much of the national budget goes to military and defense, and they don't want to support that through their investments. It's not super common, but it's interesting to think about.
ETF.com: For clients who don't want to use Treasuries, what does their fixed income allocation look like? I imagine they must have very strong opinions about particular corporate bonds and international bonds, as well.
Dreizler: Here's the thing with impact and customization. You’ll run in to people with very strong opinions, and the more dollars they have, the easier it is to customize. But you have to look at what the client's requests are and what their financial needs are.
Find the best thing for them and talk with them about whatever it is that you’re recommending—which may not be perfect; there's no perfect portfolio. But our job is, as professionals, to find the best thing, then set expectations and continue to monitor, and continue to have those conversations with clients.
ETF.com: To follow up on this idea of customization, do you think direct indexing could be the next big trend in ESG?
Dreizler: I do see the tie-in with direct indexing and being able to put a values or ESG filter on top of that, while being able to get really close to the underlying index. It's happening now, at a smaller scale. So I think it will get more and more common.
But funds have such a strong foothold in the industry that I think, as much as we all talk about direct indexing, it's going to happen slowly. Like everything else in financial services, we move pretty slow.
ETF.com: What else will you be talking about in your keynote?
Dreizler: One of the things I want to talk about is how to actually build this all into a practice, in a very big-picture way.
One of the pitfalls I see is that companies get excited about this, and they'll sometimes start with the marketing—"What do we call it?", "Who's our new target?"—and all these exciting business development questions. But marketing is the last piece.
You have to start with assessing the interest of your current clients and prospects—as well as your own internal interests—to make sure that you have a strong foundation. Then you need to get ready internally, operationally, to actually implement the portfolios. Then you get to marketing.
I've seen companies try to work it the other way around, and it doesn't go well; then they say, "Well, we tried impact investing and it didn't work."
ETF.com: I can understand why folks might want to jump the gun, though. Over the last several months, I keep hearing from advisors about how incorporating impact investing into their practice has been a great way to drum up new business and get referrals from the clients they already have.
Dreizler: Absolutely. I tell financial advisors that, even if you don't have a solution built for this yet, you still should be talking to clients to assess their interest. Depending on their practice, you can say, "Hey, Mr. or Mrs. Client, I know that sustainable investing is a growing part of the investing arena. Maybe you've heard of it, maybe you haven't. Can I explain it to you for a few minutes?" Because many clients don't know about it until you explain it to them.
Then you can say, "We're doing our due diligence and we think we can craft a good product if there's enough interest from our clients, so we're curious about your feedback." That way, you can develop something that your client actually is interested in and looking for.
Just having that conversation assures the client that you do know what's going on in the space, and you are a good person to talk to about this, in case somebody else approaches them—another advisor offering a values-aligned portfolio, maybe. You've opened the door to that conversation, instead of shutting it down.
ETF.com: One of the objections I've heard to incorporating impact or SRI investments is that advisors feel it just doesn't fit with what they do; they don't want to get “emotional.” Would you speak a little bit about that? How should advisors think about tailoring their ESG approach with authenticity?
Dreizler: If you're just sort of slapping a label on it, that's transparent to most clients. You'll run into the same issues as if you were putting a green label on something that's not really green.
So maybe you're not comfortable talking about values; maybe your firm is looking at ESG factors because they're good indicators of long-term risk. That's one way.
But personally, I think we need to get better about talking about our values. If we get back to what investing really is—the very basics of it is giving companies money to run their businesses—we're choosing what companies we give that money to.
ETF.com: What's one theme or trend you think will become a bigger part of the conversation in the ESG space moving forward?
Dreizler: There's a lot going around about munis assessing the environmental impact of climate change on that municipality, and whether they're preparing for it. Especially if you're talking about 30-year bonds, the long-term risk of climate change to infrastructure and cities is something investors need to be aware of. There are even insurance companies that are no longer insuring in certain places now. It will be a long-term issue, and if you’re buying long-term bonds, it's a risk that you have to consider.
(For more information, see: Inside Fixed Income & Dividend Investing Summit Conference, Nov. 12-13, 2019, San Diego)
Contact Lara Crigger at [email protected]