A shift to ESG helped Jeff Gitterman rediscover his passion for the profession.
A few days after the United States pulled out of the Paris climate accords in June, Jeff Gitterman wasn’t showing signs of concern, a surprising reaction from someone who recently pivoted his financial advisory firm to embrace environmental, sustainability, and governance, or ESG, investing. The news, he says, would do little to derail the efforts of corporations to curb carbon emissions and mitigate the effects of climate change, and investors weren’t backing away from supporting those companies either.
“The momentum for ESG isn’t slowing,” he says. “Companies are committed to climate change solutions because they understand the situation, and they’re doing something about it, not because of Paris.”
Yes, he concedes, it would mean a diminished role for U.S. leadership on the issue. But the other impact will be to inspire investors eager to make their voices heard on the issue. “Years from now, there will be a statue of Trump in Central Park with the inscription, ‘He saved the world, even though he didn’t want to,’” Gitterman says.
If true, Gitterman, cofounder of Gitterman Wealth Management of Edison, N.J., with $450 million in assets under management, is in good position to benefit. The firm has been helping academics manage their retirement nest eggs since the early 1990s, and Gitterman’s new ESG push is a message that is resonating with the clients.
Sold on Performance
In April 2016, the firm introduced two model portfolios and separately managed accounts based on ESG factors. Gitterman named them the SMART Portfolios, for Sustainability Metrics Applied to Risk Tolerance. and they have found a following. Shortly after Trump’s climate accords announcement, the firm converted $20 million of its clients’ assets into those strategies.
Investors are drawn to the mission of ESG, but it wouldn’t mean much if the performance didn’t back it up. According to a 2012 analysis by Deutsche Bank, the ESG argument has legs. The bank examined 100 studies of sustainable investing. It found that in 85% of the studies, companies with high ESG ratings had accounting- based outperformance. In 89% of the studies, ESG companies also saw market-based outperformance. Studies since have found similar results. Companies that do right by their customers, workers, suppliers, and the environment are better managed and, therefore, achieve better financial results.
Take workplace conditions, for example. A company might be able to squeeze out a few dollars here and there by skimping on wages and benefits or demanding grueling work hours. But that will ultimately backfire with employee attrition. “Millennials are not loyal to their employers the way that baby boomers were,” Gitterman says. “If they’re not in a company where they’re feeling valued, they’ll leave. If you want to retain employees and be sustainable, you must pay attention to how you treat your workers.”
The reason? Nonfinancial factors count for a lot. According to the research firm Ocean Tomo, 87% of the share price of the average S&P 500 stock is attributed to intangible assets. In 1975, just 17% were. These include customer loyalty, brand identity, and reliability, all things that don’t show up on a balance sheet. For example, Tesla TSLA, the electric carmaker, has a market cap of $62 billion. General Motors