Cutting Through the ESG Noise: Index-Based SMAs Offer Personalization Without the Politics

I recently read a great article in the Financial Times (linked here for those who subscribe) that talked about the history of ESG, broke down all of these debates and added a few additional complications I had not even considered – such as the way the war in Ukraine has in some ways created conflict between the E, S, and G. Environmental and social goals can come into conflict when governments are desperately trying to reduce their reliance on Russian oil. A new view is that old frameworks that ‘punished’ firms for having more than a certain threshold of “defense spending” may no longer be so ethically clear in the face of a war for freedom in Europe and the need to ensure NATO countries have adequate defenses and can provide arms to Ukraine. And so on. In other words, the increasingly complicated world is further muddying the waters for ESG.

This all got me to thinking that, for financial advisors looking to provide personalization in client portfolios and wanting to help clients express values and priorities in their investments, the landscape might look pretty confusing right now. But we believe this is a perfect use case for index-based SMAs. With the right starting index and/or the right technology platform, advisors can not only provide very tailored and personalized investment portfolios, but they can also provide personalized tax management to their clients. This can help improve overall outcomes and deepen relationships.

So, forget all of this current debate about ESG and whether it's good or bad, whether the ESG ratings are helping or hurting, whether investors should or shouldn't embrace one thing at the expense of another, etc. If you create a portfolio of index-based SMAs for your client, you and your client can decide how to adjust the portfolio based on your client's specific personal investment goals and his or her personal views and beliefs and what's important to her and her family. Does she want to be opportunistic and take advantage of the fact that fossil fuel companies are doing well right now and invest in them in the short term for the benefit of higher returns, with an understanding that she wants to divest later and focus on more sustainable energy firms in the future? Does she want, in an international index, to avoid certain countries? Does she work for a public company, have lots of stock options and needs to exclude that firm/industry/sector from her portfolio to ensure overall diversification of her wealth?

Index-based SMAs allow the advisor to have these discussions with their clients rather than both of you having to read about the portfolio managers and CEOs of asset management firms debating these topics in the headlines and making decisions and trade-offs for you. As Saker Nusseibeh, chief executive of Federated Hermes, stated in the FT article, “We must not mix up ethical with ESG, because they are two separate things. Being ethical is the prerogative of the client.”

Contact us today to learn more about index-based SMAs with Vestmark.

There is no assurance that a separately managed account (“SMA”) will achieve its investment objective. SMAs are subject to market risk, which is the possibility that the market values of the securities in an account will decline and that the value of the securities may therefore be less than what you paid for them.

There is no assurance that investment products based upon indices will accurately track index performance or provide positive investment returns. Inclusion of a security within an index is not a recommendation by VAS to buy, sell, or hold such security, nor is it considered to be investment advice.

Investment strategies that seek to enhance after-tax performance may be unable to fully realize strategic gains or harvest losses. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit.