Preparing for SRI Questions from Clients and Regulators

This transcript has been edited for clarity.

Dan Carreno: Thank you for tuning in to Rewilding Wall Street, where we provide analysis and insights into the ever-evolving world of sustainable investing. I'm Dan Carreno.

Brittany Damico: And I'm Brittany Damico. And today, we will be talking about the various ways that the most sophisticated wealth managers are integrating ESG and sustainability into their practices at a foundational level. We'll also share some of the best practices we have seen from the wealth and asset managers regarding integrating sustainability and ESG into their firm's DNA.

Dan Carreno: So why are we doing this? Well, we've seen a lot over the last few years. Between Brittany and myself, we've worked in the wealth management space, for asset managers for ESG data providers and have even been at the largest compliance consulting firm in the industry. So, in that process, we have seen and worked with everything from small RIAs to multi-billion-dollar private equity firms and everything in between. North America, all over the world, all the way to Australia. Working with that kind of diversity of firms has flagged the fact for us that things are getting organized in the sustainable investing world. Whereas not that long ago, just a few years ago, it was common for people to build portfolios around sustainability in a more one-off fashion. But those days are ending, and just a lot more organization is being built around sustainable investing. Why is that? We've seen it driven from two major parts of the market. Most importantly, clients. Investors have been getting more educated and sophisticated around sustainability and values-based investing. In fact, a good survey that Morgan Stanley conducted recently showed that 87% of institutional asset owners seek money managers with firm-level ESG policies. They want to know that people have done their homework ahead of time and are thinking about the various issues and ways that they're doing this for clients. And, of course, the other aspect of it is the regulatory environment. We all know that whether it be the SEC or other regulatory agencies out there, there is an increased focus on ESG issues. So again, preparing for exam questions and things coming down the pike makes sense.

Brittany Damico: Everything you just stated illustrates the necessity for more codified sustainable investment policies and procedures and all these different components for building that foundation. And so today, things that we're going to look at and that we have seen these other firms incorporate that help them make this foundation are going to be things like policies and procedures relating to the sustainability mandates for their firm, investment policy statements for their clients that have sustainability provisions within, as well as implementing investment manager due diligence questionnaires, also, again, adding those sustainable investing provisions within those. And then lastly, as you'd mentioned, being prepared for the inevitable audit that is coming. What do you need to have in order, and what are the odds to be the most prepared when they come calling? So Dan, why don't you explain a little bit about what policies and procedures look like.

Dan Carreno: It's just documenting and codifying, "Hey, this is our philosophy, our processes as it pertains to sustainable investing, for example, these are the data sources that we look at, whether it's free or whether we subscribe to a third-party ESG data source,” and putting those things into the policies and procedures. There's one important thing I want to flag on this as well, especially in this day and age where sustainable investing ESG has become more politically polarizing. It's a best practice to document the sources and studies a wealth manager has reviewed to ensure that sustainable investing is appropriate from a fiduciary standpoint. And so, for us here at O-Six, we recommend two foundational documents to many of the folks we speak to. One is a meta-analysis conducted in 2015, and then there was a follow-up to that conducted by NYU in 2020. Between these two studies, about 3,000 individual academic studies look at sustainability and non-financial performance and various ESG factors. And so, by citing those studies, you can say, "Hey, what we've done is we've looked at the bulk of the available research. Three thousand studies in the marketplace. On average, those studies tell us that integrating ESG or sustainability into investment portfolios is either additive to the financial returns of the portfolio or neutral. And there's a small minority of studies that have found that there's any negative association there.” So, long story short, I feel that this is important to ensure that ESG has been researched and identified as being consistent with helping clients meet their financial goals. And then we also talked about investment policy statements a second ago, very, very similar, there, just putting these things into writing so that the clients understand again, what the philosophy is, that you've researched these issues, and that it is appropriate from a financial standpoint. So, that is the high-level takeaway regarding some of the things we've seen with policies and procedures and investment policy statements. But what about due diligence, Brittany?

Brittany Damico: So yes, these investment manager due diligence questionnaires are another important element in codifying the sustainable investment process for your firm. And you want to incorporate the sustainable investing provisions here in a way that as the industry is moving towards standardizing sustainable investing, the verbiage, the data, the evaluation frameworks, it's just prudent to gather all of this data in a more formalized way that identifies the third-party managers' different approaches. Incorporating ESG and sustainability-focused questions in your DDQ is essential for identifying, managing, and capitalizing on these ESG-related risks and opportunities, ensuring long-term sustainability, enhancing reputation, complying with regulations, and making well-informed holistic business decisions. And the type of questions we're talking about when looking at sustainability provisions. Consider asking about the firm's sustainability philosophy, whether or not they're a PRI signatory, or if they align with any other global frameworks similar to the United Nations Sustainable Development Goals. You can request a copy of their sustainability policies and procedures and ask how many dedicated ESG and sustainability individuals they have on staff. Other pertinent questions you may want to ask about things more directly associated with the strategy. Do they have materiality mapping about their screening methodologies and where their data sources are coming from? Equally important are their stewardship philosophies, what kind of advocacy initiatives they have, and how they approach them. Last but not least is the necessity for preparing for sustainability and ESG regulatory oversight. This circles back down to a lot of what you were saying about having codified policies and procedures, having outlined investment policy statements with your clients, and having all of that as the foundation you've already created. Because we've seen as the sustainable investment industry has grown, we've reached $8.4 trillion as of early 2022 according to USSIF, the significance in the eyes of the regulators has grown. So everything that we're talking about today will be what you need to have on hand as that foundation for when the questions come. And so I think it's just important to have those policies and procedures be able to back up what you're saying, make sure that it shows that you've done your research and that you have followed guidelines and, again, have avoided that haphazard approach to sustainability within your practice.

Dan Carreno: Yeah, and Brittany, that I've seen several exam questions relating to ESG, and I think that just the policies and procedures that will check a lot of the boxes and make it that much easier. But some questions around carbon data and things like that have caught other folks I know off guard. So it's important to consider that ahead of time and how one might go about addressing the questions from regulators instead of being super reactive to it.

Brittany Damico: With that in mind, part of our mission at O-Six is to support the success of sustainable investing across capital markets. We want to make it easier and more accessible for all the wealth managers we're talking to. So, we have created what we refer to as the O-Six Sustainable Investing Guidebook that we are happy to share. So far, what we have made within this Guidebook breaks down into about five or six different sections. We have templates and sample investment policy statements with sustainable investing provisions. We have a sample sustainable investing policy and procedures that touches on what Dan referenced earlier about those stats and meta-analysis and why you want to incorporate that into your practice. We've got the sample due diligence questionnaire with the sustainable investing provisions. This is interesting because it was generated from feedback we received in the field. There was an advisor who runs a model for a larger RIA who had asked us if we had any resources or knew of any because while they're doing their due diligence for the managers they're working with, there are a lot of templates for just traditional DDQs. But, fewer resources were out there regarding the sustainable investing components. So, this was something we created in response to a request from that advisor. We also have a sustainable investing due diligence report that we can help make for anybody who does the investment manager due diligence questionnaire, receives answers, and wants to generate a report that they can show to their clients that shows the level of due diligence that they have performed on their managers. And then lastly, as Dan has referenced, we have heard quite a few different responses from advisors who have gone through audits with their practice primarily focused on sustainability. So we've got a component of the guidebook that's all about preparation for regulatory oversight, and it has a few sample questions that you could see. And I will add the caveat that all of the components of the guidebook are things that you might want to review use as a template but always run past your compliance team. Dan and I are not compliance experts; we're just helping develop resources from the experiences that we've had.

Dan Carreno: And what I would say here, Brittany, is most investment professionals that I know out there are passionate about constructing portfolios serving their clients. Nobody gets worked up about drafting policies and procedures, certainly not listening to a podcast about it, so we're trying to alleviate some of that more administrative and operational burden associated with running any type of investment business. But this way, you can get these more foundational pieces in place and then focus your time as a wealth manager on talking to clients, serving clients, and managing investment portfolios. The work that most of us are more passionate about.

Brittany Damico: So, for all of our listeners out there, if you're interested in one of the components we discussed or the guidebook, we'd be happy to share any of these resources with you. You can visit us at our osixpartners.com. There is a Contact Us page, and we would happily forward it to you.

Dan Carreno: And, of course, we're always happy to meet with anybody and to go over any components of the guidebook. Provide any additional context, and try to be a resource. Anyway, that is helpful in the marketplace. Please let us know. Even though this was a dry podcast about policies and procedures, it was an important one and a great discussion. And I appreciate your insights, Brittany. We will start wrapping it up there, but before we do, we will take a minute to be human beings and share something inspiring or intriguing that we've come across recently in a short segment that we call around the campfire. Okay? So, Brittany, it's getting cold out there. We're almost into the winter months. You'll be bundled up, sitting around a campfire, drinking something warmer, like mulled wine. I don't know. But whatever you're drinking, when you're talking with your friends, colleagues, whoever it may be, what might you be sharing with them?

Brittany Damico: I love mulled wine. So that was on point. I love the season. It is my favorite. I love winter. I hail from Southern California, where we don't have seasons. So, I live in Seattle now, and I love changing leaves and all of this. One thing I don't love about the holiday season is the amount of waste you see. There's so much in terms of these little decorations, trinkets, and all of these things, and a lot of wrapping paper that needs to be recyclable. For the past three or four years, I've been trying to do a zero-waste Christmas and different ways that I can find decorations to be crafty. I can reduce the amount of waste associated with the season. I want to share some fun things I have seen and offer them to anybody to try. So that's listening out there. One component is dried oranges. That is something that is a beautiful decoration. If you slice an orange into little quarter-inch slices and dry them in the oven, you can use them in wreaths, garlands, or as Christmas tree ornaments. And it's just a zero-waste, beautiful, fun, crafty thing that doesn't take a lot of energy or skill. It's just drying out an orange and using things like paper bags from the grocery store. You can turn them inside out. You can use twill, use it as wrapping paper. And again, that's recyclable. It's something that if you have kids, they can draw on, and they can make their wrapping paper. So, things like that are fun, unique ways to reduce waste and enjoy the holiday season. Things that you can do with your family. That would be my Around the Campfire way to share my Little Zero-Waste Christmas. 

Dan Carreno: Brittany, you'll be happy to hear that there are gift bags in my house that must be 20 years old. We have gifted things to people, and then they have used the same bag and sent it back to us, and then we send it back to them. And these bags are just like family heirlooms at this point. So anyway, I thought you would appreciate that. So quickly for me around the campfire, one thing that I've been sharing with many friends and family has been a great book I read recently called "The Swarm." The author is Frank Schätzing. And it was recently actually made into a TV show, which is how I heard about it. But the general premise is about humanity and our relationship with the oceans and how unsustainable that relationship is. And this is a science fiction book. And so the author thought of a clever way, envisioning what if the ocean started rebelling and punching back a little bit and what that would look like. So, it was an amazing book. I enjoyed it. I highly recommend it to anybody looking for a long read over the holiday season. Okay, so let's wrap it up there. For those interested in more information about us, go to osixpartners.com and contact us through the website. Thank you for tuning in today. We will be back soon with another episode of Rewilding Wall Street.

Disclosure

The opinions expressed herein are those of O-Six Impact Partners, LLC and are subject to change without notice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk, and past performance is not indicative of future results. Therefore, it should not be assumed that any specific investment or investment strategy made reference to directly or indirectly by O-Six Impact Partners, LLC will be profitable. Be sure to first consult with a qualified financial adviser, tax professional, or attorney before implementing any strategy or recommendation discussed herein.

O-Six Impact Partners, LLC specializes in providing outsourced sales and marketing services to investment managers and related financial entities. These services may include lead generation, client outreach, relationship management, and promotional activities aimed at enhancing the visibility and market presence of investment products. O-Six Impact Partners’ services are strictly limited to sales and marketing efforts. Under no circumstances should any communication, content, or action taken by O-Six Impact Partners be construed as investment advice or recommendations.