Get Started

    Environmental, social, and governance (ESG) investing is an opportunity—not just for investors looking to put their assets to work for both financial gain and a positive impact, but also for advisors. Clients are searching for advisors willing to put the effort into discovering their values and determining how best to translate them into an investment portfolio.

    A projected one-third of assets under management (AUM) is expected to be earmarked for ESG purposes. Seventy-two percent of investors report wanting to discuss ESG investing with their advisors, a figure that balloons to 95 percent of Millennial investors.

    The demand is out there. So, how should advisors approach this subject with their clients and meet that demand?

    Common Client Misconceptions About ESG Investing

    Your clients usually aren’t financial experts—that’s why they’re working with you after all. It should come as no surprise that they hold certain misconceptions about financial concepts in general and ESG in particular. Here are some of the most common myths you should be prepared to counter when discussing ESG goals with your clients.

    1. You Don’t Have to Sacrifice Performance in an ESG Portfolio

    When people first hear about ESG, it can be tough to mesh with their traditional beliefs about investing, the stock market, and the economy. Investing assets in a way that’s environmentally friendly, socially just, or focused on good governance just seems like it’s going to underperform. If the goal is pure profit, then surely the fewer restrictions one places on their investment, the better it will perform—right?

    Of course, financial advisors know that you don’t have to sacrifice your values for a positive return. Many of the factors that make an investment worthy of the ESG label contribute to a company’s success. Corporations with ethical governance tend to have happier, more productive employees. Environmentally friendly organizations have lower energy costs, are developing advanced technologies for the future, and have positive associations with their brand. Companies committed to social justice also enjoy the benefits of a strong brand as well as the well-researched benefits that diversity confers on business performance.

    Yet instinctively, investors feel that doing good requires sacrificing profit. Plenty of investors are still willing to make that exchange regardless, but it’s incumbent on their financial advisors to clarify that they don’t have to—because values-based investing and performance-based investing are not mutually exclusive.

    2. ESG Investing Is Not Inherently Political

    Depending on where a client lands on the political spectrum, the words “environmental” and “social” can feel politically charged. It can seem like ESG investing is only for progressives. This, however, is just an unfortunate coincidence arising from the nomenclature of ESG investing and the subjects that have become politicized in our society. In reality, ESG investing might be better described as values-driven investing.

    “Values” don’t, in and of themselves, have political connotations. An investor might have political values, but the idea of investing on the basis of values, in general, won’t seem like an inherently political act. This framing can help some clients understand the intention behind ESG (or values-based) investing.

    As a financial advisor, you can help clarify this difference to your more politically aligned clients. Discuss what their unique values are and evaluate how that could best be reflected in their ESG portfolio. It could be the case, for instance, that your client’s faith is very important to them. In this case, you could surface investment opportunities that align with their religious values.

    3. ESG Investing Isn’t a Monolith

    In many ways, addressing this misconception addresses the others. ESG investing isn’t any one thing, and there isn’t one set of investment vehicles that are ESG. Instead, ESG investing is a lens to view investments through. 

    If your client doesn’t care about environmental issues, then they can still make ESG investments. The same applies for social or governance concerns. That’s why framing ESG investing as values-based investing is often more intuitive to clients; it’s not about investing in a strictly circumscribed set of investment vehicles but finding those investments that best align with your client’s most cherished values.

    How Do You Translate Client Values into an ESG Investment Strategy?

    The crux of any client-centric ESG investment strategy is balancing the client’s values with a robust, performant ESG portfolio.

    For many clients, this may be a straightforward exercise. If a client wants to make a generally positive impact through their investments and doesn't have highly specific ESG goals, then you can develop a well-balanced, diversified portfolio that has ESG principles baked in.

    Building a balanced investment portfolio for a client with highly specific goals tends to require some more effort, however. A client might say that they want their assets solely invested in securities related to green technology. In this case, it’s important to explain why this could be a risky move and present an alternative approach where green tech securities play a large role but are balanced out by other assets. If the client understands the risk but insists on investing their assets in this single direction, that’s fine—financial performance simply isn’t the number one factor they want to see in an ESG portfolio.

    One way to strike this balance is to structure your initial discovery conversation with new clients that have expressed an interest in ESG investing. Start by asking about their financial goals—this way, you’ll learn in broad strokes what they’re hoping to achieve. Next, ask about their personal values. Then, bring the conversation back to their financial goals to review them in light of their values. Do their financial goals and values clash in certain places? Do they complement one another? Have their financial goals changed when seen through the lens of their personal values?

    With this understanding, you’ll be able to craft an ESG portfolio that truly reflects the client’s goals—both personal and financial.

    Incorporate ESG Into the Due Diligence Process

    Unfortunately, incorporating ESG factors in portfolio construction also complicates the due diligence process. Due diligence may still be laborious for a purely profit-driven investment portfolio, but it doesn’t require the extra work of assessing whether a given investment vehicle truly follows the ESG principles it claims to. Greenwashing is pervasive across industries and some investment companies. Any corporation or investment fund is going to assert that they’re committed to good governance and social responsibility, but it’s easy to pay lip service to those values and harder to act on them.

    Finding out who is really walking the walk can be a challenge, especially when you have to balance that with your responsibilities to your clients. That’s why we recommend advisors explore outsourcing their due diligence and investment management process. Doing so means you’ll have more time to spend discovering your clients’ values and ensuring that their assets are managed in a way that aligns with those values. 

    AssetMark

    AssetMark is a leading provider of extensive wealth management and technology solutions that help financial advisors meet the ever-changing needs of their clients and businesses.


    June 29, 2022

    Retirement Plan Offerings: Understanding 401(k)s and 403(b)s

    More often than not, advisors don't specialize in 401(k)s or other retirement plans. Retirement plan advisories usually require specialized training and certifications, which...
    June 22, 2022

    Independent vs. Wirehouse: The Pros and Cons (Only You Can Decide)

    It’s an ongoing debate – working with a wirehouse vs. being an independent advisor – and there are passionate proponents on both sides. Still, if you are a financial advisor...
    June 15, 2022

    What Young Investors Expect from Financial Advisors

    More than half of Gen Z and Millennials wish they had made different investment decisions in the last year. With half of Gen Z already venturing into the world of investments...

    Sign Up For Our Blog

    Subscribe to get updates on new content.