Investors—across all generations and wealth categories—are becoming increasingly interested in ESG (environmental, social, and governance) investing, and advisors who want to remain competitive need to seriously consider how their firms can develop ESG strategies for their clients.

Consider this: 70% of high-net-worth investors indicated they would take an advisor’s ESG practices into consideration when choosing whether to work with them or not.

ESG (Environmental, Social, and Governance) investing—also commonly called sustainable investing, impact investing, or socially responsible investing (SRI)—isn’t new. But both the current value of assets and projected amount of assets invested in ESG strategies can’t be ignored.

Citigroup projects that more than $1 trillion will be invested in ESG-friendly ETFs by 2030—a stark rise from its previous prediction of $300 billion.

ESG Strategies Show Rapid Rise in Popularity

ESG investing is hitting a massive wave of popularity, and numerous major trends are driving the demand.

Millennials, Gen X, and Women Investors

Millennials and GenXers are slowly becoming the predominant investors. Younger generations are set to inherit $59 trillion assets between now and 2060 and tend to be more impact-focused. According to a study from Fidelity Charitable, 77% of affluent millennials and 72% of Gen X investors have made an ESG investment, compared to only 30% of affluent baby boomers and older generations.

Women are also twice as likely to consider social responsibility alongside return when investing. This should stand out for financial advisors who want to keep clients as wealth and assets transfer to the next generation.

Data from InvestmentNews and Financial Advisor magazine, respectively, show that two out of three adult children and 70% of widows switch advisors after they inherit wealth—mostly due to differences in investment goals.

Overall Popularity

But younger generations and women aren’t the only ones seeking ESG strategies. In one recent survey, 76% of investors said that environmental, social, and governance issues should play an important role in the construction of their portfolios.

Impacts and Returns

While making an impact for the causes you believe in sounds great, every investor still wants to generate returns.

Contrary to what most advisors might think, research shows that ESG strategies don’t sacrifice on performance and often perform better than traditional investments.

A University of Hamburg and Deutsche Asset Management meta-study of over 2,000 academic ESG performance studies found that 88% of companies with robust sustainability practices demonstrate better operational performance and cash flows, 90% demonstrate that prudent sustainability practices have a positive influence on investment performance, and, on a whole, companies with high ESG ratings tend to have a lower cost of capital.

Talking to Clients About ESG Investing

Growth-focused RIAs should prepare themselves to talk with clients about ESG strategies as investors want your help to achieve certain impact goals while still generating financial returns.

Clients may have a specific reason for requesting an ESG investing strategy. They may have heard about it on the news or maybe they have a specific value or belief they want to address.

For example, your clients may want to exclude alcohol, gambling, and oil securities or only include investments in companies that focus on animal welfare and green initiatives.

Listening to your clients will help you address how their current strategy does or doesn’t line up with their proposed ideas.

Suggesting ESG Investing to Clients

Instead of waiting on your clients, however, demonstrate your value as an advisor by suggesting a look at ESG investing strategies.

Start by giving clear definitions of what ESG strategies are and how your clients could incorporate them.  As a fiduciary, it’s your responsibility to educate clients about trends they are discovering.

You may have also remembered your clients talking about an ESG preference previously, in which you'd want to let them know that it is an option now. Either way, it's best to explain how ESG can fit into the client’s risk profile and investing plan, and then ask if they feel like this is something they want to explore.

Adding ESG Strategies to Your Firm

Because more investors are interested in ESG strategies, it’s important for advisory firms to consider adding them.  But there’s a lot that goes into developing an ESG policy for your firm—especially one that’s up to SEC standards.

If you decide to manage ESG investing, Orion Advisor Solutions can help you discover:

  • Where the SEC stands on ESG investing
  • How to accommodate your clients’ personal preferences without venturing into political territory
  • What to consider when building an ESG scoring framework

Ready to learn more about ESG investing and its impact on your clients? Contact us to learn what steps you should take to implement an ESG policy in your advisory firm.

 

ESG, Diversity Key to Luring UHNW Advice ... - Financial Advisor IQ." 27 Apr. 2021, https://modules.financialadvisoriq.com/c/3149544/396464/diversity_luring_uhnw_advice_clients?referrer_module=topicBox&module_order=7. Accessed 29 Apr. 2021.

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