A Strong ESG Investment Strategy Protects You and Your Clients

ESG StrategyEnvironmental, Social and Governance (“ESG”), Socially Responsible Investing (“SRI”), Sustainable Development Goals (“SDG”), are similar approaches to supporting initiatives designed to benefit society worldwide. From a public investing perspective, the goals are certainly not new, but today’s access to vast amounts of data and the technology to analyze it offers the greatest opportunities yet for investors to do more than say, “I don’t want any Alcohol, Tobacco, or Firearms stock in my portfolio.”

No matter what you call it, if your firm or its Advisors are touting these as investment strategies to clients, you need to have a specific and robust Investment Product Selection, Monitoring, Suitability, and Disclosure program in place. 

These days it’s possible to research the impact a public company is having on things like climate change, geographically based socioeconomic results, depletion of scarce resources, and so on.  The data also makes it possible to create Investment Strategies around one or more of these social dynamics, while creating the ability to monitor the appropriate use of specific products within these investment strategies against stated objectives.

What You Should Be Doing

Many firms or their Advisors are now going to market leveraging the popularity and power of ESG investing.  They often use terminology with clients such as “….do good while doing well with your investments.”  While this can be the basis for a sound marketing approach, firms and their advisors need to make sure that they have a clearly identified and defined approach to this segment of investing, as well as the written, specific disclosures that provide clients with detailed information on how the firm will discern products that meet their stated investment objectives. 

It’s important to note that one of the challenges and strengths of offering an ESG Investment Strategy to the market is that there is no single definition nor any single and specifically targeted regulatory guidance on ESG Investing.  While this enables firms to craft their own specific approach and targeted investment niches to take to clients as a differentiator, it makes the regulatory risks that much higher if firms are not following all of the Reg-BI provisions and/or fiduciary duties.

Firms must update their documented internal Due Diligence process based on current research standards, and their Written Supervisory Procedures to address who, and how, they will conduct ongoing monitoring of the products in this category. In particular, firms must also address the necessary enhancements to the Suitability standards that are being used to review the appropriateness of such investments within client portfolios.

Oyster Consulting can provide guidance and best practices in these areas, and assist with Reg BI compliance as you develop your ESG Investment Strategy. To learn more, click here or call (804) 965-5400.


About the Authors:

Jeffrey Wilk started his career as an Advisor and has an impeccable track record of success in strategic planning and execution, business assessment, transformation and growth, and driving collaborative team dynamics and success. Jeff routinely delivers measurable double-digit P&L, Sales, and ROI results within entrepreneurial and enterprise size organizations. He has had strong success in varied business cycles, leading cross-functional teams to solve the most challenging and often “diplomatic” problems.  A respected Independent, Insurance, and RIA Channel Leader, he has first-hand experience with firms  ranging in size from 300 to 10,000 Advisors, and platforms from under $1B to over $100B in AUM. He was directly accountable for several Mergers/Acquisitions, platform transformations, patent-pending products, and operating model RFPs and overhauls, including delivering the industry’s first “Robo” platform. ​

Bill Reilly leverages his examination expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers and investment advisers through both proactive and reactive regulatory processes and compliance issues. Among others Bill conducts FINRA Rule 3120, Supervisory Control Reviews, Annual Compliance Reviews for federally and state-covered investment advisers, creates and/or updates policies and procedures for opening and monitoring senior and vulnerable adult client accounts, has been retained as an expert witness by law firms representing industry participants in arbitrations and regulatory matters, updates policies and procedures for both broker dealer and investment advisers, and acts as an independent third party in reviewing firm activity prior to and as a result of regulatory actions and settlements.