By Thomas Kostigen
It’s well understood that individual investors are seeking companies that embrace environmental, social and governance (ESG) protocols. So too is it understood that mutual fund managers and institutional investors are allocating more capital to ESG investments. Yet the beneficiaries of trusts have apparently been left in the lurches by the trustees who oversee their portfolios. That needs to change.
In a recent survey of the trust industry conducted by Northern Trust, the Chicago-based financial services company that caters mostly to high-net-worth individuals and institutions, only 23% of respondents say they make investment decisions based on ESG criteria.
The apparent disconnect, according to Northern Trust, lies with properly measuring ESG performance, finding companies that score well across many sustainability metrics, and, ironically, the explosion of ESG investment options that make choosing a strategy or manager difficult.
Trusts are wealth management vehicles that are often associated with estate planning. They are utilized for everything from sophisticated tax strategies to generational planning. Indeed, trust funds are popularly known for their ties to the idle rich who rely on their interest payments as their major source of income. The conservative nature of trusts, designed as wealth preservation vehicles not usually for capital appreciation, may also be behind the ESG lag.
“Generational differences may relate to perceptions of risk. Older investors, who tend to be more risk-averse, could feel hesitant about the lack of a standard ESG definition,” says Katie Nixon, Northern Trust Wealth Management Chief Investment Officer. “With so many new products available, older investors may be cautious about choosing one.”
With more ROI information and data about ESG becoming available, however, more trusts may begin to open their wallets to these opportunities.
More than $174 billion are managed through trust investment vehicles in the United States. Allocating more of these assets to the ESG realm could add significantly to the boon in ESG demand. In fact, “more than 80% of advisors expect growing demand for incorporating sustainable investment objectives in trusts over the next five years,” according to The Northern Trust Institute’s 2021 Wealth Planning Symposium survey of more than 170 estate planning attorneys, accountants, fiduciaries and other professional advisors to high-net-worth clients.
A good financial advisor can help set up, manage, and even rebalance portfolio assets in a trust. To be sure, some trusts will continue to ignore the trend under the guise of remaining risk-averse in their approach to asset management. But if ESG assets under management continue to rise and returns along with them, trustees may be imposing more risk on their portfolios, not less. And that’s a disservice to the beneficiaries who rely on them for myriad aspects of their financial lives.
Northern Trust underscores this challenge. It notes that a common misperception of fiduciary duties, and widely held presumptions of underperformance, have discouraged some trustees from implementing sustainable investing objectives.
More trusts should be opening their wallets to ESG opportunities. And beneficiaries should understand that they have a strong say in how their trusts are managed. It’s time to trust the growth in ESG.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.