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.