A Strong ESG Investment Strategy Protects You and Your Clients

By Bill Reilly and Jeff Wilk

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Environmental, 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
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Bill Reilly

Bill Reilly is a respected financial services professional with over 35 years of consulting and regulatory experience. Bill leverages his industry expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers, investment advisers and law firms providing legal representation through both proactive and reactive regulatory processes and compliance issues.

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Jeffrey Wilk

Jeff Wilk started his career as an Advisor and has a strong track record of executive success in strategic planning and execution, business assessment, transformation and growth. Jeff was directly accountable for several mergers/acquisitions, product and digital platform transformations, patent-pending products, and operating model RFPs and overhauls, including delivering the industry’s first “Robo” platform.