A deep diver conversation about the crucial role advisors can play in helping investors participate in the journey to net zero.
The following blog entry is an excerpt from a conversation between NEI Chief Investment Officer John Bai and Director of Corporate Engagement Jamie Bonham in the lead-up to the COP26 climate conference. Here they discuss the crucial role advisors can play in helping investors participate in the journey to net-zero.
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JOHN BAI: Let’s take this talk of collaboration even further—to the advisor level, and then right down to the individual investor. Because, you know, that notion of the “single voice,” as you called it, is very powerful. Individual investors, and advisors with books of business that might seem like small amounts in the grand scheme of what’s needed to make this change—it all starts with them, and I’m not sure they really understand how much power they have, and how critical they are to making this happen.
Deloitte came out with a really interesting study called 2021 Climate Check: Business views on environmental sustainability. Eighty percent of the executives they talked to agreed they should be acting on climate change, and so the question is really, “Okay, well, you already believe it, so what would push you into more action on climate change?” The number one answer was shareholder demand. Not increased societal and employee action, not an intensification of climate-related disasters, which were second and third. Shareholder demand. That was the thing CEOs said was most likely to spur them to action.
Perhaps even more interesting was what were identified as the most ineffective things. When you go to the bottom of the list you see government action and punitive damages, as well as competitive pressure. And then at the very bottom, CEOs said boycott of our business by consumers. And I suspect that’s counterintuitive for most people, who would imagine their most effective tool for driving a company to change is the decision to buy or not to buy. But the evidence here shows that from the corporation’s perspective, it’s the least likely tool to force change. Canadians have much more power as investors than they do as consumers, but my guess is, most have absolutely no idea that’s the case. So there is a tremendous amount of education required for people to understand their rights as active owners, and how they can use those rights for positive change.
Who’s going to teach them? Who’s going to bring those individual investors together under one roof, to get to that “single voice”? Advisors can do it. Advisors have this wonderful opportunity—and they really should consider looking at it this way, I believe. They have this opportunity to mobilize their clients’ capital toward investments that are working toward common goals. This could take the form of, first, recommending investment funds managed by asset owners that use their rights such as proxy voting or engagement to get companies to move more urgently to a net-zero world. Second, advisors could recommend funds that are oriented toward climate solutions, whether equity or fixed income. Third, it could manifest in the advisor’s security selection process, if that’s part of what they do. In doing so, every building block in the portfolio construction process, whether it be funds or individual securities, can be selected through an ESG lens—and climate change is just one consideration among many. And then advisors can add that up across their book, across dealers, across the country, around the world—and that’s how we mobilize capital.
JAMIE BONHAM: I’d emphasize the importance of transparency as a key consideration for advisors. Advisors are in a position to talk directly with their clients about where the client’s money is going and what impact that money is having—but they have to get that information first from the investment firm, or from the company itself. And increasingly, as investors get a taste for this, and recognize their rights, their power, they’re going to want to see the results. Investment firms, advisors, companies— they’ll all be accountable at some level for giving investors a view into the change they’re driving.
There’s a storytelling aspect to this. Just like companies and investment firms are telling stories about how they’re making a difference, advisors can be telling stories to clients about where their money is going and the difference it’s making.
Corporate engagement successes, proxy voting data and rationale, impact reports—advisors can use all of these sources of storytelling material with their clients to link up their investment progress with progress toward a low-carbon future. It’s just such a natural fit for the advisor-client relationship, and in my view, it behooves us all to support that relationship, because it’s an essential node of collaboration. The more investors are saying, “I want my money to go here and not here,” the more capital we’re able to mobilize away from problem areas and toward solutions.