Morningstar Magazine - August/September 2017 - 70

Investors

Re-Energized by Sustainability
A shift to ESG helped Jeff Gitterman
rediscover his passion for the profession.

USER PROFILE

Ilana Polyak

A few days after the United States pulled out
of the Paris climate accords in June, Jeff
Gitterman wasn't showing signs of concern,
a surprising reaction from someone who recently
pivoted his financial advisory firm to embrace
environmental, sustainability, and governance,
or ESG, investing. The news, he says, would
do little to derail the efforts of corporations to curb
carbon emissions and mitigate the effects
of climate change, and investors weren't backing
away from supporting those companies either.
"The momentum for ESG isn't slowing," he says.
"Companies are committed to climate change
solutions because they understand the situation,
and they're doing something about it, not
because of Paris."
Yes, he concedes, it would mean a diminished role
for U.S. leadership on the issue. But the other
impact will be to inspire investors eager to make
their voices heard on the issue. "Years from
now, there will be a statue of Trump in Central Park
with the inscription, 'He saved the world, even
though he didn't want to,'" Gitterman says.
If true, Gitterman, cofounder of Gitterman Wealth
Management of Edison, N.J., with $450 million
in assets under management, is in good position to
benefit. The firm has been helping academics
manage their retirement nest eggs since the early
1990s, and Gitterman's new ESG push is a message
that is resonating with the clients.
Sold on Performance

In April 2016, the firm introduced two model

Morningstar August/September 2017

portfolios and separately managed accounts
based on ESG factors. Gitterman named them the
SMART Portfolios, for Sustainability Metrics
Applied to Risk Tolerance. and they have found
a following. Shortly after Trump's climate
accords announcement, the firm converted $20
million of its clients' assets into those strategies.
Investors are drawn to the mission of ESG,
but it wouldn't mean much if the performance
didn't back it up. According to a 2012
analysis by Deutsche Bank, the ESG argument has
legs. The bank examined 100 studies of sustainable
investing. It found that in 85% of the studies,
companies with high ESG ratings had accounting-based outperformance. In 89% of the
studies, ESG companies also saw market-based
outperformance. Studies since have found similar
results. Companies that do right by their
customers, workers, suppliers, and the environment are better managed and, therefore, achieve
better financial results.
Take workplace conditions, for example.
A company might be able to squeeze out a few
dollars here and there by skimping on wages and
benefits or demanding grueling work hours.
But that will ultimately backfire with employee
attrition. "Millennials are not loyal to their
employers the way that baby boomers were,"
Gitterman says. "If they're not in a company where
they're feeling valued, they'll leave. If you want
to retain employees and be sustainable, you must
pay attention to how you treat your workers."
The reason? Nonfinancial factors count for a lot.
According to the research firm Ocean Tomo,
87% of the share price of the average S&P 500
stock is attributed to intangible assets. In 1975, just
17% were. These include customer loyalty, brand

identity, and reliability, all things that don't show
up on a balance sheet. For example, Tesla TSLA,
the electric carmaker, has a market cap of
$62 billion. General Motors GM, despite the fact
that its revenue leaves Tesla on the side of the
road, is worth $52 billion. "There's nothing
on the balance sheet to justify the stock price,"
Gitterman says. "But investors want to be part of
the Tesla story."
One out of every $5 under professional management carries an ESG label, according to US
SIF. And the investing style is especially popular
with millennials. Research from Schroders
finds that ESG is significantly more important to
millennials than to older investors. As the
generation stands to inherit some $30 trillion over
the next 30 years, ESG will be an important service
area for financial advisors, Gitterman says.
"The mutual funds get it; the investors get it,"
he says. "Now, we just need the advisors to get it."
Blending Personal Passion and Work
ESG is the latest iteration of social investing. But
it's different, Gitterman says. Socially responsible
investing is exclusionary. Investors seek to
avoid certain industries and practices. ESG, on the
other hand, incorporates data that's relevant
to a company's share price.

As a meditation teacher, associate producer of
the documentary film Planetary, and author of the
book Beyond Success: Redefining the Meaning
of Prosperity, Gitterman says that he'd been
thinking about his higher purpose. His outside
projects were important in that quest, but his work
life as an advisor wasn't bringing the same
sense of fulfillment-until he realized that ESG
could blend the two.
In March 2016, Morningstar introduced the
Sustainability Rating, making it possible to analyze
funds through an ESG filter. That gave Gitterman
the tools to take ESG to the portfolio level.
Just 14% of the firm's assets are invested in
the ESG models and separately managed accounts.
But Gitterman believes that more will follow
in coming years. The style isn't a hard sell to the
firm's core clientele of teachers, a market
that Gitterman has served since early in his career.

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