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.
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
- 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.
- 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.
- 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.
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.
BMO Global Asset Management Disclosures:
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax, compliance or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
* As compared to an investment that generates an equivalent amount of interest income.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.
Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Life Assurance Company is the issuer of the BMO Segregated Funds individual variable insurance contract referred to in the Information Folder and the guarantor of any guarantee provisions therein. The BMO GIF Information Folder and Policy Provisions provide full details and govern in all cases. BMO GIF products are offered through BMO Life Assurance, a separate legal entity than BMO Global Asset Management and wholly owned by BMO Financial Group. Segregated funds are only available for sale by individuals with appropriate insurance licences and are not considered a mutual fund. Segregated fund fees are higher than mutual funds as they include insurance fees to provide for the guarantees on deposits at maturity or on death.
Legal and regulatory disclosures
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.