Environmental, social and governance (ESG) investing has become a buzz term in the financial world, and over the past few years it has infiltrated headlines, company mission statements and investors’ inquiries with increasing frequency.

ESG investing falls under the broader umbrella term of “sustainable investing,” and focuses on how companies treat natural resources, manage relationships with employees and their community, and exercise ethical business practices. With the rising concern over climate change and a global movement towards inclusivity, companies’ ESG practices have come under closer scrutiny over the past few years, and taking ESG factors into consideration has become more popular within the investment landscape. 

Despite the growing hype around ESG investing, many investors—and even financial professionals—tend not to understand fully the true value behind ESG investment opportunities. Misconceptions are common around who ESG investing is for, what role it can potentially play in portfolio success, and why it should matter to advisors and investors alike.  

The dichotomy between the proliferation of ESG options and the relative lack of understanding of it presents a massive opportunity for financial professionals to engage effectively with current clients and appeal to prospective new clients. Global Climate Change Week, which takes place October 14–20, offers financial professionals an opportune time to learn and teach the essentials of ESG investing.

Learn The Ins And Outs

There is so much information available about ESG investing, which can make it an overwhelming topic to broach. It may be hard to know where to start or to find the time to make sense of all the available information, but those apprehensions demonstrate why it’s so crucial for financial professionals to educate themselves. Investors rely on professionals to help them navigate the complexities of an ever-evolving investment world, and while they might be hearing and wondering about the term, they’ll likely be even more overwhelmed trying to decipher what it means.

Financial professionals should start with the basics and learn the nuances and terminology of ESG investing. To start, find credible sources, like the United Nations supported Principles for Responsible Investment website, that break down what qualifies as an ESG issue, why ESG factors are gaining significance, and how investors are thinking about incorporating ESG principles into their investment strategy.

Additionally, financial professionals should pay close attention to the language that asset managers use when they talk about ESG. For example, some asset managers use vague language to give the impression that they care about ESG issues, but they might not actually be proactively implementing the principles. There is a difference between asset managers who say that they consider ESG factors and those who say that they integrate ESG factors in their decision-making.

Be A Mythbuster

Because there is so much hype around it and because it is growing rapidly, ESG investing is plagued by misperceptions that can cause investors to pause. For example, some people may believe that investing in ESG issues means compromising on returns, that it imposes certain values or morals on others, or that it is for a certain demographic—specifically, for millennials.

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