SMAs at Work: Aligning Investment and Sustainability Goals

The following vignette, part of our “SMAs at Work” series, describes how a hypothetical financial advisor could use Dimensional SMAs to meet the needs of a prospective investor. The advisor’s firm has already signed an investment management agreement with Dimensional. 

In Part 2, the advisor goes to lunch with longtime clients Jasmine and Luis, who are eager to further align their financial investments with their sustainability values.
 

In advance of her lunch meeting with Jasmine and Luis, Mary checks Dimensional’s SMA Center and reminds herself that her clients’ SMA is set up for sustainability-focused proxy voting, excludes stocks in the oil, gas, and consumable fuels industry, and has a current value of $550,000. She downloads a reader-friendly summary of the account, including aggregate equity characteristics and various environmental metrics, such as exposure to greenhouse gas (GHG) emissions intensity, which is important to her clients.

Mary has known Jasmine and Luis for years and when the talk at lunch turns to investments, she is not surprised that the focus is ESG. Jasmine and Luis are curious about the sustainability filters in their US Large Cap Core SMA—and, specifically, how those filters impact their exposure to certain environmental concerns.

Since they have allocated the fixed income portion of their investments to Dimensional’s sustainability strategies, they’re familiar with many of the metrics that Mary is sharing around exposure to GHG emissions intensity and potential emissions from fossil fuel reserves. The couple see that excluding stocks in the oil, gas, and consumable fuels industry from their SMA reduces their exposure to emissions relative to the market’s exposure, but they don’t feel the exclusion goes far enough to align with their personal values.

Mary recommends the couple exclude the highest GHG emitters in terms of emissions intensity. This move will allow them to screen out the companies with the poorest GHG profiles, not just in the oil and gas industry, but also in all other sectors. Such an approach is similar to what Jasmine and Luis get from the Dimensional Global Sustainability Fixed Income Portfolio.¹

Before proceeding, the clients would like to see the impact of these additional exclusions on their portfolio and tax bill. Mary commits to follow up with Jasmine and Luis.

Back at her office, Mary brings up Jasmine and Luis’s account in the SMA Center and applies the emissions intensity filters that she highlighted over lunch. Applying the filters to the existing SMA excludes 0.16% of the strategy’s holdings and reduces GHG by over 10 tons of carbon dioxide equivalent (CO₂e) per million of USD sales vs. the starting strategy’s comparable metric. To address her clients’ concerns about taxes, Mary requests a Tax Transition Analysis to gauge the impact of the potential sales.

Two business days later, Dimensional returns the Tax Transition Analysis to Mary with several options for charitable gifting that would allow Jasmine and Luis to exclude the relevant stocks from their portfolio while incorporating their tax sensitivity and philanthropic goals. Through the portfolio management process, stocks subject to the new ESG exclusion but not identified for charitable gifting will be liquidated. The cash will be used to rebalance Jasmine and Luis’s account not just away from stocks with high GHG intensity, but also toward stocks with higher expected returns (i.e., those with smaller market capitalizations, lower relative prices, and higher profitability²).

Mary calls her clients with the information, and they are happy with the improvement in the environmental metrics and aggregate equity characteristics. They are also pleased to learn they can achieve this improvement without a big tax impact while supporting organizations they care about. They greenlight the change. Mary submits a request in the SMA Center and will notify her clients when the change is made over the next few days.

Mary and her colleague Ben have decided to set up their SMA Center workspaces such that each can view the SMA investments managed by the other—both live, funded accounts as well as those not yet finalized. Mary and Ben feel this supports their team-based approach and also allows for continuity when one partner is out on vacation or due to an illness. After finishing her work for the day, Mary consults with Ben about her plans to proceed with the customized SMA solutions. Ben is curious about how Mary customized the ESG screens for Jasmine and Luis, so together they pull up the SMA Center and view the account. Before going home, Mary sees a notification from the SMA Center that an account she had launched for a client two days ago is now live and funded.