How to implement sustainable practices at your firm – and avoid backlash

As appeared in Barron’s.

When it comes to ESG and socially responsible investing, advisory firms are feeling the heat to practice what they preach.

Advisors these days are under two types of pressure when it comes to sustainable investing. The first relates to whether they should incorporate such strategies into client portfolios given ongoing critiques of the sector, and if so, how. The second, more subtle, pressure comes from clients, employees, and communities who want firms to adopt their own sustainable practices.

There are many reasons to follow the path of sustainability, but instituting practices like reducing waste and carbon, promoting diversity, equity, and inclusion, fostering better opportunities and living standards for employees, engaging with local communities, and asking vendors and other business partners to adopt similar practices will present real challenges on a number of fronts. The key is to acknowledge and address these challenges, choosing goals that are achievable and which can successfully become engrained into a firm’s culture.

ESG backlash. As is often the way when established norms are questioned, the proliferation of sustainable investing—especially when under the “ESG” label—has led to resistance. Some argue that there is insufficient evidence that long-term returns can outperform traditional investment strategies. Others maintain that investors who use their capital to promote sustainability are misguided; that the impact of their investments will be too incremental and ephemeral, and that such large-scale goals can only be achieved by world governments.

An advisor adopting sustainable practices must make the business case, arguing, for example, that clients, prospects, and employees will be attracted to a firm that earnestly embraces sustainability. They also need to demonstrate that allocating capital to these initiatives is a prudent investment in the company’s profitability, growth, and long-term stability.

Once instituted, an advisor must demonstrate that these changes are making a meaningful difference by measuring and tracking waste or carbon reduction, diversity goals, dollars/hours spent on philanthropic projects, and so on.

Politics. A consequence of the increasing ideological polarization in our society is that politics can pervade our regular behaviors, including how we run our businesses. As a result, clients and employees may perceive decisions to adopt waste-reduction regimens or improve diversity as politically motivated—even as an attack on capitalism itself!

Exacerbating the problem: Those who see decisions through a political lens are often the most vocal about them. To overcome such resistance, advocates for sustainable practices must first establish their political neutrality on the topic. Only then can they articulate the business case for their plans while addressing specific concerns.

Greenwashing. There has been growing attention on companies with questionable sustainable practices, especially in the environmental context. Some have been accused of greenwashing—promoting policies that are not carried out,  are implemented with virtually no impact, or are adopted as an excuse to reduce expenses or increase prices. In order to avoid such accusations, advisory firms must be prepared to demonstrate, with specificity, that they have carried out their plans or are in the process of doing so.

Regulatory scrutiny. The SEC has become active in identifying greenwashing and ensuring that sustainable investing solutions are delivered as promised. Advisors can best avoid scrutiny by simply telling the truth. Another regulatory issue involves the fiduciary standard that governs RIAs and compels them to serve and prioritize the best interests of clients.

Can an advisor be a fiduciary while also adopting sustainable practices? Yes, but only if they promote the best interests of clients with policies that allow firms to:

  • Sustain themselves into the future;
  • Attract and retain top talent;
  • Remain profitable;
  • Prepare for future legal mandates around sustainability; and
  • Connect with communities.

Cost. Unlike larger companies that embrace sustainability, smaller advisory firms with smaller budgets can face disproportionate challenges as some—though not all—sustainable practices come at a cost. Advisors encountering this hurdle should take a longer-term perspective, seeing immediate expenses as an investment in a prosperous future. They can also achieve goals over a multiyear time frame, enabling them to spread out financial outlays.

When considering all these challenges, I am reminded of the pioneers who started the independent advisor movement decades ago and the many hurdles they overcame. They were not deterred and neither will be today’s advisors as they lead the industry into the next frontier.