- What is ESG?
- Trendy, but Who Cares?
- Advisors are Missing the ESG Market.
- How Do Advisors Attract ESG Clients?
We all can become complacent in our work at times. As daily tasks pile up, we spend our working days simply addressing the next appointment or putting out small fires as they appear. Yet, this clouds our vision of the future and we can miss opportunities for growth, get trapped in a fixed mindset and stagnate. Calvert Investing’s Investment News Research shows that advisors are aware of the growing popularity of socially responsible investing but not taking action to capture the market.
What is ESG?
The Environmental Social Government (ESG) market, especially, is still up for grabs. Yet, it often gets lumped underneath the ethical investing umbrella despite being very distinct in advantageous ways. Socially Responsible Investing uses negative screens that could leave a portfolio overexposed to certain economic industries. ESG investing, however, searches throughout all sectors to find companies that meet environmental, social, and governmental principles. These positive screens make ESG investing more competitive than other ethical investing methods because it more closely matches the market while minimizing the downside volatility risk of investing in indices.
Trendy, but Who Cares?
Millennials are not the only ones concerned with the impact of their investments but only half of millennials said they would trust a robo-advisor. Just this month, Swell, a promising digital advice platform offering sustainable-themed portfolios, closed because it could not reach scale by attracting millennials. 30% of Gen Xers (1961-1981), though, are interested in ESG strategies and increasingly prefer to manage investments through advisors than with online ethical investing tools or with a DIY approach. Furthermore, the opportunity is available for advisors who target any wealth group. 25% of mass affluent investors and 31% of ultra-high-net-worth investors express high interest.
Advisors are Missing the ESG Market
If those numbers do not scream opportunity, then perhaps these will: 32% of advisors use ESG to attract new clients; 25% use it to create a business niche; and only 44% consider ESG when constructing portfolios. Lastly, 84% of advisors say ESG issues are important to their clients, up from 73% in 2017. Best of all, advisors control the means to build a competitive advantage to capture ESG clients in their area.
Investors look for advisors because they want to set a strategy, forget it, and benefit from the peace of mind from knowing their financial future is solid. Calvert suggests that investors have the interest but lack the knowledge to pursue ESG investing on their own. Investors struggle to evaluate performance of ESG funds compared to traditional investing strategies. They also lack the resources to research their own investment opportunity or simply believe that there is a limited field of possible ESG investment options.
Advisors should be aware that the opportunity for investing by ESG principles has never been better. Investing Counterpoint covered the IPO of a promising company, Beyond Meat, providing alternative animal-free protein products. Morningstar data shows that ESG Funds attracted $8.9 billion in the first six months of 2019 alone. Funds now attract investors by orienting their impact goal around specific ESG issues – climate change, clean technology, and emissions and waste management are the most popular among investors.
How Do Advisors Attract ESG Clients?
- Financial advisors need to become ESG educators before advisors to lead discussions, answer and ask questions that will demonstrate competence and understanding of the investor’s impact goals. Explain what ESG investing is and how it is different from socially responsible investment before selling products.
- ESG investors do not define success like traditional investors, so advisors need to show how an investment option connects with the investor’s values.
- Ethical investing is not just popular among millennials. While wealthier clients and females comprise the most interested group, don’t overlook Generation Xers and baby boomers. These groups may be just as eager but unaware that ESG investing is a competitive and viable strategy.
- Start the conversation. Calvert finds that advisors start the ESG conversation less than 25% of the time with new clients despite most being aware that the investing strategy is growing in popularity.
Financial advisor businesses can ride the wave of ESG interest, but internal discussions need to happen to understand their unique position. Larkspur-Rixtrema’s blog, Investing Counterpoint,will continue to bring you content designed to educate you on ESG investing and other investing opportunities because remaining ignorant or indifferent is to miss a tremendous business opportunity. So, start the ESG investing conversation with your clients, because, otherwise, another advisor will.
Read On: To ESG or Not to ESG Check out Rixtrema’s CEO’s, Yon Perullo, take on what to talk about to client investors about adopting ESG investing practices.