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Myth Busting Intergenerational Wealth Transfer and ESG

As Baby Boomers begin passing on their savings to the next generation, BMO’s Head of Responsible Investment, Nalini Feuilloley, underscores a key point: Thinking that Millennials/Generation Z are the only ones who care about ESG considerations is one theory that could significantly impair your estate planning and client retention strategies.

March 2022

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Nalini Feuilloley

Director, Responsible Investment Team

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With an estimated $700 billion to be transferred from aging Canadians to their beneficiaries by 2026, intergenerational wealth continues to be top of mind with many Advisors.1 However, there’s a lot to consider beyond just this large pool of assets; investment professionals also need to debunk some myths and misperceptions about Baby Boomers and their Millennial children – especially as it relates to ESG issues (Environmental, Social and Governance).

Many Advisors have already adopted a more holistic approach to estate planning and wealth transfer due to shifting client expectations, one that includes the involvement of the extended family. For those concerned about retaining assets over the long term, a cohesive plan needs to be developed early on that involves all interested parties, and helps to facilitate honest and clear conversations.

The ESG reality: Changing attitude across demographics

One explanation for this change is the heightened expectations for transparency from younger generations, combined with their increased sensitivity around sustainability practices and specific ESG issues like climate change and diversity and inclusion (D&I).

When it comes to ensuring the successful transfer of wealth from the estate owner to their children, establishing alignment on the asset mix is often a key component in being able to retain next-gen clients. Specifically, the presence of an ESG mandate can go a long way to safeguarding these investments—and your business.

In recent years, there’s been a big shift in recognizing that ESG factors are material to investment strategy. While the institutional market has started recognizing this over the past decade, the retail sector is not far behind.

What’s critical to debunk is a myth around the investment preferences of different demographics, particularly as it relates to hot-button ESG issues. What many find surprising is that the perspectives of multiple generations are actually more comparable than you might expect.

It is clear today, more than ever, that ESG factors are material to any long-term investment strategy.

For example, recent research shows that while, perhaps unsurprisingly, 87% of Millennials feel that responsible (sustainable) investing is more important to them today than five years ago, a considerable 67% of Boomers share that sentiment. By comparison, the Gen X cohort, who fall in between these two groups—with many already in or close to retirement—are at 79%.2

*Millennials are born between 1983-2000, GenX 1978-1982, Baby boomers 1949-1967.

A sooner-rather-than-later solution

What this tells us about building portfolios for your estate clients is that it’s never too early to include ESG integrated solutions as part of their asset mix. And, more importantly, Advisors might want to speak to their older wealth accumulating clients about the topic now—before someone else does.

Failing to have a sense of urgency could have short and long-term implications for you, your clients and your business, diminishing both the ability to meet expectations as clients approach (or are already in) retirement—and also the likelihood of beneficiaries staying with you once the estate owners pass on.

The good news is having this more strategic, proactive view may help to differentiate your practice. By proactively using ESG factors as a means to engage across multi-generations, you can add value for all demographics, resulting in stronger, longer-term relationships.

Prompts for client conversations

  1. Climate Risk: Many catastrophic weather events took place in 2021, globally as well as here in Canada. This has demonstrated that climate change poses significant physical and economic risks to our society—and consequently can increase risks to an investment portfolio if not properly integrated into the investment analysis process.

  2. Diversity and Inclusion: Another important topic from a responsible investment perspective is D&I. The well-publicized events that transpired over the past 2 years—most notably the killing of George Floyd and the subsequent uprising against racism have shone a bright light on this subject. Specifically, growing intolerance around social injustice quickly moved to the mainstream, bringing with it increased dissatisfaction from the general public, whose expectations of corporations are focused on them implementing concrete D&I strategies.

    Given the increased frequency and material impact of these ESG factors, Advisors can differentiate themselves by actively engaging in conversations with their clients on ESG risks and the potential impact this can have on their investments. In essence, you have another reason to address this matter head-on, providing investors with tangible solutions and responsible investing options they may have otherwise not considered.

  3. BMO MyESG QuizTM and Advisor Resources: Have your clients take the online MyESG Online QuizTM and use the results alongside with the Advisor Toolkit to direct your subsequent conversations, which can now be based on their views on ESG issues. When investors complete this simple two-minute online quiz, you can use the results provided to tailor the conversation to match their ESG Persona.

    Note that there are four distinct ESG personas – from skeptical to motivated. All four of which would still warrant conversations on the importance of ESG factors to investing, but impact the approach you would use. These personas have been built based on our statistical analysis of investor beliefs and behaviours and the respective conversation cues, which align with each one.

In the same breath, there’s been a call for greater focus from investors; there’s less tolerance in the market for companies who fail to enact policies, procedures and practices to effectively manage ESG risks. There are numerous examples that support how poorly managed ESG business practices can trickle down to impact company performance and share price. These are aspects worth considering given they can adversely affect a portfolio.

With the spotlight on mainstream ESG factors like climate change and D&I, this is a trend that’s not likely to diminish anytime soon. Advisors would be wise to consider how asset managers are incorporating ESG issues into the products they’re managing in order to make better asset allocation decisions. Most importantly, you should also be prepared to have these conversations with your clients.

Enhanced disclosure on the way

One of the most interesting observations from my experience at the 2021 COP26 Climate Change Conference was the coming together between public and private sectors on the urgency of the climate crisis, and the actions that needed to be taken from all stakeholder groups. This was in contrast to the past, where politicians generally led these discussions and the finance community and private sector did not have a seat at the same table.

A significant investment story from COP26 that’s relevant for Advisors was the announcement of the creation of the International Sustainability Standards Board (ISSB) by the International Financial Reporting Standards (IFRS) Foundation. The ISSB intends to consolidate several existing reporting bodies, such as the Value Reporting Foundation and the Sustainability Accounting Standards Board, to develop a baseline of sustainability related disclosure standards. Investors around the world can then use this to more readily identify ESG risks and opportunities when deciding where to put their money.

The development of global standards that can be used for comparisons across companies, industries and geographies will no doubt provide a substantive value-add for the entire investment community. In turn, this will do away with data gaps when evaluating the sustainability profile of companies within the same portfolio.

A recent study by the RIA found the vast majority of Canadian Advisors were comfortable discussing ESG issues, but their knowledge of the subject was limited.

Next-gen assets: The upside of action

A recurring theme we’ve heard recently among those who favour responsible investing approaches is that their Advisor didn’t provide them with sufficient options or guidance. Added to this, the 2021 RIA Advisor Opinion Survey found the vast majority of Canadian Advisors surveyed were comfortable discussing ESG issues with clients, but their knowledge of the subject was limited.4 Based on this reality, those Advisors that become more informed may reap the benefits of greater client satisfaction.

As you refine your approach to “the great wealth transfer”, it’s wise to give consideration to the role of ESG factors and responsible investing — and to keep in mind, contrary to what some might believe, it’s importance to all generations.

By recognizing the applicability of ESG factors to investment management and then aligning the investment preferences of your clients’ beneficiaries with their beliefs and values, you can incorporate solutions into their portfolio while also ensuring you’re better prepared to engage – and retain – the next generation.

Contact your BMO Global Asset Management Regional Sales Representative to discuss which ESG and Responsible Investment solutions are best suited to your clients.

1 Helen Burnett-Nichols, “Intergenerational wealth transfer presents big risk to advisors,” The Globe and Mail,” September 1, 2021.

2 “A ‘Great Wealth Transfer’ Is Coming. What Will It Mean for Art?,” The New York Times, December 18, 2019.

3 PRI 2018 Reporting Framework responses.

4 Responsible Investment Association, “Study shows Canadian financial advisors are comfortable engaging with clients on ESG, but subject matter knowledge is limited,” 2021 RIA Advisor Opinion Survey, last accessed February 17, 2022.

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