The question of legacy has become a pertinent one to the wealth management industry in recent years, as various factors converge to drive a large transfer of assets. This is often looked at from the philanthropy side of the table, but increasingly the possibility to make a difference with investment assets has come under the spotlight.

The question of legacy has become a pertinent one to the wealth management industry in recent years, as various factors converge to drive a large transfer of assets. This is often looked at from the philanthropy side of the table, but increasingly the possibility to make a difference with investment assets has come under the spotlight.

And one firm unafraid to plant itself firmly in the camp of those who believe you can make a real difference with investment assets while also making a competitive return is Veris Wealth Partners, a San Francisco-based investment manager.

“This is what we do everyday, it’s not a niche market strategy for us it’s what we believe in,” says Patricia Farrar-Rivas, the firm’s chief executive. “We believe it is a smarter way to invest and we deliver both performance and social benefits for our investors; we try to do that in as equal proportions as possible.”

Farrar-Rivas has been a part of the sustainable investing community since the early 1990s, as in fact have all the partners and senior executives at Veris. So she knows the ropes, and has also seen the industry change over those years.

“You’re really seeing larger family offices, larger family foundations, and private and public foundations saying we want to do this, but we don’t know how to do it, how can you help us do it?” she tells Family Wealth Report.

Often this demand to “test the water” comes from an individual family or board member, who encourages other members to explore this option.

She says whereas before the trend had been for investors to transfer all of their assets to an ESG-based approach, while some still do this she is seeing more and more “carve outs” of large investment portfolios.

Slowly, slowly

Some people feel they need to take this step-by-step approach because they view this kind of investing as “non-traditional,” and worry about reducing their options.

“I think the fears that [people] need to address are performance and fiduciary responsibility… People don’t like to change,” says Farrar-Rivas.

“I think for us the level of the financial advisor is a key blockade, so if you have a financial advisor that doesn’t have enough information to offer this, there’s a lot of resistance there.”

She believes over half of advisors now would like to be able to offer this to clients – but they may not have the right tools.

The usual argument put forward by an advisor that doesn’t have experience in this is over performance, but in fact the major studies show that screening for ESG criteria “does not deter performance,” says Farrar-Rivas. “All of the studies show either competitive performance or potentially some opportunity for outperformance.”

But the concept of sustainable investing is far less esoteric than it used to be, as demonstrated by the news in April that The California Public Employees’ Retirement System (CalPERS) is adopting an ESG framework.

CalPERS, which has a portfolio of around $231.9 billion, has a fiduciary duty and big commitments in terms of income ($14 billion per year in pension benefits); its transfer to a formal ESG model will test this model yet again and - if all goes smoothly - bring it further into the mainstream investment world.

Sustainability as a fiduciary duty?

This highlights another issue mentioned by Farrar-Rivas – that of fiduciary duty. One of the concerns of marrying fiduciary duty with sustainable investing is over cost, i.e. the concern that the cost of doing this will impact the underlying portfolio. However, Farrar-Rivas says that in the case of a foundation, for example, there is sufficient breadth within the law to allow slightly higher costs if there is enough focus on donor intent. Furthermore, additional costs are “gradually going away” as the industry expands, she adds.

For its part, CalPERS argues in its report that sustainability is part of its duty to members, many of whom will not retire for another 40 years, as its most simple definition is “the ability to continue”.

Anyone who is investing their wealth with a multi-generational or very long-term approach could argue the same thing. “Even Warren Buffett recently made this remark, saying ESG criteria could be seen as a fiduciary responsibility to consider when looking at investments.”

The catch is, of course, that people have widely differing views about what is sustainable.

To try and account for differences in client preferences while creating benchmark standards, Veris uses indexes that have been created such as the MSCI KLD index. This provides a track record to clients.

So, for example, it will compare “the S&P 500 against the KLD 400 and the MSCI World against the KLD World index…this is the analysis that creates a track record,” she explains. “The Dow Jones Sustainability Index has a 10-year track record, which shows competitiveness.”

The DJSI performed roughly on a par with the Dow Jones Global Large-Cap Total Stock Market Index in 2011 (total returns in US dollars); underperformed it in 2010; outperformed it in 2008, and performed roughly the same in 2008.

Veris then creates customized portfolios for clients based on their specific ideas about sustainability, and places them with investment managers with integrated ESG criteria in their investment philosophy and process.

“We understand the investment managers and our funds that are out there, that’s our job is to really understand the landscape,” says Farrar-Rivas.

“We have an open architecture platform, the only type of product that we do is creating opportunities for clients to come in at lower minimums to very high minimum opportunities, or a proprietary portfolio of independent managers.”

She says that while the product range has expanded dramatically, “we need more products across the continuum of opportunities.”

From the 80s to the 00s

In terms of how the industry has developed, Farrar-Rivas says: “After you saw the divestments from South Africa…in the late 80s, there was a significant number of products that were developed then. Then I would say it’s been growing gradually since the late 80s.”

“But we’ve seen a big surge in products, particularly in the impact private equity/private debt area, that started in the 2005 period,” she continues, “and then around 2007 we began to see more traditional managers and large private banking divisions start offering sustainable products.”

Meanwhile, the latest development is a proliferation of different approaches, such as impact investing, driven by a wave of entrepreneurs turning their attention to investing – and bringing the techniques of the business sector.

“Impact investing: that’s really the new word for sustainable investing and responsible investing," she says. “It’s very fascinating seeing the number of people that have made significant wealth as entrepreneurs” and who feel emboldened by their ability in that field, and decide to use their skills and money to “make a difference.”

Over the years she has also seen a marked improvement in how companies communicate their sustainability performance.

“It’s significant the amount of transparency that exists today, but there are always issues where you’re looking for more transparency.”

She gives “fracking” as an example of how, as technology and business practices adapt, so too do the transparency needs.

“When that happened there was a whole new effort put forward to get natural gas companies to disclose what chemicals they’re using when pushing water into shale … what I’ve seen in companies’ response… is a much quicker move to disclosing what those chemicals are.”

Companies today are often driven by a “leader” mentality on ESG criteria, Farrar-Rivas believes, where one company opens up to the public about what it’s doing and then forms an industry group to discuss the safest, best way to do things.

“So it’s a very different environment from the late 80s and early 90s, when there was that resistance from companies and you really had to do significant work, significant shareholder work to get companies to move.”

In those earlier times, she says, for an environmental shareholder resolution “if you were lucky” you might get “an 8 per cent vote supporting the resolution, whereas today you’ll see numbers in double digits, so we’re in a different environment; we’re at a tipping point.”

“The whole idea that you can go to Bloomberg and there’s a sustainability tab – that’s changing how analysts are starting to look at companies,” she says.

When sustainable investing has really taken over will be when companies proactively conform with ESG criteria to get investment.

“What we want to start seeing - and we’re not there yet - is when you get an analyst’s report and there’s an ESG part of an analyst report - I don’t think we’re there yet.”