$30.7 Trillion worldwide – that was the size of the marketplace for ESG investing in 20181, and it has only continued to grow. What’s fueling this growth? High net worth individuals and families, institutions and companies are participating for many reasons. They want investments that support their personal values, help contribute to society, protect the environment, and more.
How should a wealth management firm or financial advisor communicate with clients about these topics?
HNW individuals are excited about socially responsible investing – 85% expressed interest, according to a Morgan Stanley study.2 With increasing demand and investment opportunities, now is the time for advisors to become a trusted source of information. While you’ll want to tailor this to your firm, we’d like to share some thoughts on how you might approach a prospective client presentation about ESG investing.
1 – What is ESG investing?
Sustainable investing marketplace in the US in 2019 – one out of every three dollars under professional management3
First, you’ll want to make it easy for clients to understand. For example, ESG investing uses Environmental, Social and Governance criteria to evaluate companies, as well as traditional performance measures. Clients may be hearing these options referred to as socially responsible investing, ethical investing, values-based investing and impact investing – which appeals to their personal values.
||Renewable resources, climate, clean energy
||Human rights and diversity
||Corporate conduct and ethics, such as providing equal pay or avoiding unfair labor practices
2 – Ways to invest
Clients may want to know how to participate in the ESG market. You can mention ways to get started, such as through mutual funds or exchange traded funds (ETFs) that evaluate companies using both ESG factors and traditional criteria (e.g., earnings per share).
When introducing common approaches for selecting ESG strategies, use easy-to-understand explanations that avoid industry jargon. For example:
- Instead of saying “negative screens,” explain that one approach excludes certain categories of stocks, such as companies producing alcohol or tobacco.
- Instead of saying “norm-based screens,” mention there are options that comply with international standards that may appeal to their values on human rights, the environment, or anti-corruption (such as standards established by the United Nations Global Compact).4
3 – Exploring clients’ interests
What do clients want to know about ESG investing, and what are they most passionate about? Is it improving the environment, addressing social inequities, or promoting good governance? To help your clients explore sustainable investments:
- Ask about their interest in ESG investing. Will Trout, Director of Wealth Management at Javelin Strategy & Research, found younger investors like Millennials and Gen-Z are much more interested in ESG than older generations. They also expect personalized recommendations that reflect their specific interests.
- Guide them through a discussion of values. To help clients identify socially responsible investing options that are important to them, Fidelity, for example, has developed a matrix of four ESG mindsets – the Security Seeker, Alignment Seeker, Expression Seeker, and Impact Seeker.5
- Explain that ESG investing uses scores to evaluate how well a company is doing in each area. However, the scoring criteria have not yet been standardized. Help clients assess additional sources of information, such as a fund’s policy statement, disclosure documents, and prospectus.
- Discuss performance. Several recent studies found that “investors do not have to pay more to align their investments with their values, or to avoid companies with poor environmental, social or governance practices.”6
4 – Ways to strengthen your conversations about ESG investing
To meet the needs and interests of prospects and clients, you can start taking action right away:
- Educate yourself – As needed, deepen your understanding of ESG investing. Connect to expertise inside your firm and find other available resources on the topic. For example, Barclays identified 10 ESG themes for 2021.
- Discover – For clients who want to learn more about ESG investments, what do they care most about? Given their interest, what resources does your firm offer, such as articles, videos and other educational tools? For ideas to make client communications more effective, see Turn wealth management communications into high value assets. And consider the power of video in telling your story.
- Discuss – Reporting may provide wealth managers with the ESG data to respond to client queries and also to help point out things that may not be obvious or that are unknown to investors, e.g., ‘You have limited exposure to companies with significant environmental controversies compared to a benchmark.’7 As you prepare to present report findings, consider these 5 ways advisors can add impact to client communications.
- Comply: As always, follow your firm’s guidelines. You can also direct clients and prospects to the SEC’s guidance on Environmental, Social and Governance (ESG) Funds.
Sustainable investing can be a win for HNW clients, wealth management firms, and society too. It starts by understanding your clients’ interests, being able to communicate the basics, and providing resources that enhance their understanding.
Effective communications are key to deepening relationships and helping clients more closely match their investments to their personal values – which is especially important to millennials and Gen-Z investors. If you’re looking for support, an outside partner can help make this rich topic simple and accessible.
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Interested to explore how we can help your wealth management firm? Let’s connect for a quick chat.
1 2018 Global Sustainable Investment Review, Global Sustainable Investment Alliance
2 Sustainable Signals: Individual Investor Interest Drive by Impact, Conviction and Choice, Morgan Stanley Institute for Sustainable Investing, 2019
3 Sustainable Investing Basics, US|SIF (The Forum for Sustainable and Responsible Investment)
5 ESG Investing for Advisors: Having Better Conversations with Clients, Fidelity Investments
6 Financial Performance with Sustainable Investing, US|SIF (The Forum for Sustainable and Responsible Investment)
7 Swipe to invest: the story behind millennials and ESG investing, MSCI ESG Research LLC, March 2020