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.

Financial professionals can help their clients understand the realities of ESG investing by addressing and dispelling these kinds of common fallacies. A recent Morningstar study found that 72% of all investors showed at minimum a moderate interest in sustainable investing, and that there was little to no difference of preference for ESG investing between genders and generations (Source: Morningstar, “The True Faces of Sustainable Investing,” 2019). Recent research has also suggested that ESG investing may offer comparable returns and possibly lower risk than traditional funds, mitigating the financial trade-off concern many may express.

Aside from dismissing the stereotypes associated with ESG investing, financial professionals can also offer their clients a different perspective on ESG investing to help them move past any preconceived notions. For example, one might assume that if someone doesn’t want to invest in coal or fossil fuel, it is because of the belief that they harmfully impact the environment. Looking at it another way, though, perhaps the decision not to invest in coal or fossil fuel comes from the expectation the world is transitioning to low carbon/clean energy, which could make traditional energy sources—and companies whose revenues rely on them—obsolete.            

Translate And Tailor

While ESG investing may be or become appealing to investors, they may be thinking about it in vague terms and not see a direct connection to their own priorities. Understanding the gist of ESG investing is one thing, but applying it to their own portfolio in a way that works for them is another. There are many different ways that investors can make ESG factors work for them, and it is more than just avoiding companies with poor ESG ratings.

When talking about ESG investing with clients, financial professionals should make an effort to understand what their clients want and what’s important to them. For example, which factor—environmental, social, or governance—would take top priority? Are there any personal convictions that should be taken into account? What are their long-term objectives with ESG investing? By asking these kinds of questions and getting to know clients’ stances on certain issues, financial professionals can use their ESG learning and speak to it in terms that are relevant and valuable to the individual investors.  

ESG investing is gaining momentum, but understanding what it really is and how to approach it can be a challenge. But as demand for ESG investing continues to grow, the financial professional who eschews it or only brings it up with a certain demographic will be at a disadvantage. Conversely, the financial professional who becomes familiar with the lexicon, disregards the stereotypes, and educates their clients with a personal touch about ESG investing may have the advantage.

For financial professionals who are looking to offer current clients a fresh, on-trend perspective and to appeal to prospective new clients, now is the time to make ESG investing knowledge a part of their value proposition.

Anita Baldwin is a registered representative of Hartford Funds Distributors LLC. Check the background of this firm/individual on FINRA's BrokerCheck.