Investors are interested in knowing about opportunities in environmental, social, and governance (ESG) investing—whether in equities, open-ended mutual funds, or exchange-traded funds (ETFs)—yet not all financial advisors bring them up to clients or even know much about them. That's a lost opportunity for both sides because interest in the field has grown recently.
ESG funds accounted for 10% of funds' assets worldwide last year. "A record $649 billion poured into ESG-focused funds worldwide through Nov. 30, up from the $542 billion and $285 billion that flowed into these funds in 2020 and 2019, respectively, the latest Refinitiv Lipper data shows," according to Reuters.
One major reason for financial advisors' hesitancy in discussing ESG with clients, according to those polled by ISS Market Intelligence in 2021, is that they are skeptical about solid returns from ESG investments. However, there's a shift in the field. "Two-thirds of advisors who either currently invest client dollars into ESG or anticipate investing in the months ahead cite client interest as the primary reason to invest," wrote the authors of ISS Marketing Insights' report on ESG investing.
- About one-third of financial advisors are reluctant to talk about ESG investing with clients.
- Clients, especially those 40 and younger, often bring up ESG investing with their advisors.
- Financial advisors need to include discussions of ESG investing in meetings with clients.
How to Talk With Clients About ESG Investing
When you approach any client, your first meetings are about getting to know them and what their financial picture is, including their income, goals, family makeup, and risk tolerance. In those first meetings, you should encourage clients to discuss what truly matters beyond the numbers. At this stage of your client-financial planner relationship, this is when you focus on your client as a person and what might motivate them. Also, this is a good time to broach the topic of ESG investing.
Then, financial advisors can take two additional steps: acknowledge and understand that ESG can be prudent investing and then reimagine your investor assessment process. Discussing ESG investing as a sensible option may be at odds with your skepticism about whether this type of investing is sound. However, if you look at the numbers, it may assuage your hesitation. Globally, the course of sustainable investments, of which ESG is a part, is expected to grow to $53 trillion in assets under management (AUM) by 2025 from around $35 trillion in 2019.
Also, financial advisors and planners should discuss examples of when ESG investing turns out to be fraudulent, such as when companies use greenwashing to promote their company and products as sustainable and serving the public good when in fact, they are not.
In rethinking your investor assessment outlook, rather than zeroing in on their risk tolerance and timeline, you can show your clients that you understand what thoughts and beliefs underpin their motivations for creating a robust portfolio in general and working with you in particular. That thoughtfulness can win you the opportunity to become their long-term financial advisor.
What Are Environmental, Social, and Governance (ESG) Criteria?
Environmental, social, and governance (ESG) criteria are a set of standards for a company's behavior that socially conscious investors use to screen potential investments. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company's leadership, executive pay, audits, internal controls, and shareholder rights.
Do Clients Care About ESG?
Yes. Some 83% of consumers think companies should be actively shaping ESG best practices, and 86% of employees prefer to support or work for companies that care about the same issues they do. And in 2021, investors put $70 billion into ESG impact funds, which are up from $51.1 billion in 2020, according to Morningstar.
Does ESG Investing Pay Off?
Not always. It's true that all investments require patience, and the overall market is fairly turbulent this year. But in 2022, some ESG investors are seeing their portfolio values decline significantly on an absolute and relative basis.
The Bottom Line
When approaching new and existing clients, financial advisors and planners should make sure that discussing ESG is part of the conversation. This way, you can present the full picture of investment options and show your thoroughness.