How to Have Better ESG Conversations With Your Clients

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.

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.

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.