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Customization promises to be an important next step in the evolution of ESG investing. In the initial wave of sustainable offerings, specialist ESG managers rolled out strategies tailored to meet specific sustainable goals, while large asset managers focused on providing low-cost, scaled products designed to tap into unmet and growing demand for “some” ESG exposure. Such mass-market, low-cost ESG tilts may continue to dominate the non-specialist market for a few years. However, in the next iteration of ESG investing, we expect to see managers who provide more customized options come out ahead.
The trend to personalization is already gaining ground: a growing number of asset managers are turning to technology and focused customer experience to give them an edge in this space. The new gold standard seems to be large-scale customization, using technology to bring institutional-level investing to the retail market.
In order to deliver truly personalized options, asset managers have a number of hurdles to clear. For wealth managers seeking to offer an ESG investing solution to their clients, we believe that the following considerations must be met.
Managers offering customizable approaches should be able to provide:
- A deeper understanding of clients’ interests and concerns when it comes to ESG;
- An ability to see “inside the box” to identify the underlying components of ESG and show how they support clients’ specific investment objectives;
- Customized portfolio construction that reflects clients’ preferences and needs.
Investors today have a wide variety of goals and priorities for their ESG-related investments. These range from clients with views on specific companies to exclude from their portfolios to those who view ESG as a risk factor to be weighed alongside other stock selection criteria. Each manager has the responsibility to try to optimize client returns in accordance with their stated objectives, while catering to their individual ESG preferences. Your clients should be able to select greater or lesser degrees of sustainability, with accompanying increases/decreases in risk. But they should also be aware that these are choices that they are making – rather than investing in an added-risk strategy that purports to closely track a chosen benchmark.
Peering Inside the Box
Sustainable investing should not occur in a black box. A successful ESG investment approach carefully selects securities that increase ESG exposure in an investor’s portfolio. One of the most important contributions a quantitative manager brings to ESG investing is transparency into these ESG exposures and measurement techniques. Ideally, your clients should be able to see down to the individual stock level how ESG criteria shape the portfolio’s holdings and expected sources of return. Awareness of the contributions specific holdings are making to your clients’ sustainable goals is the hallmark of an effective ESG strategy.
Your clients may have specific goals for their ESG investments. Such unique goals require unique portfolio construction. The ability to combine your clients’ sustainability needs within their risk and return budgets is an easier task for managers who build their portfolio from distinct building blocks—like PGIM Quantitative Solutions.
Our goal is to design customizable solutions that solve for your clients’ individual ESG challenges. PGIM Quantitative Solutions' ESG approach carefully balances sustainability, risk and return considerations. We use the substitution effect to help your clients achieve their goals without giving up returns or overcompensating with unnecessary risk.
PGIM Quantitative Solutions has managed ESG investing solutions for institutional clients for many years. Now, advisors can share our deep wealth of ESG experience with their clients through the PGIM Quant Select platform. This separately managed account platform includes both ESG and tax management options at surprisingly achievable price points.
We offer varying levels of ESG incorporation, from incremental ESG improvements to fully customized sustainable strategies. PGIM Quant Select also provides values-based investing options, so clients can choose a solution that best suits their long-term sustainable objectives and aligns with their deeply held values.