Our “ESG 101” series aims to facilitate conversations between financial professionals and clients on environmental, social and governance (ESG) investing. Here, ESG Research and Development Analyst Quinn Massaroni discusses how financial professionals can assess clients’ values and financial goals to connect them with appropriate ESG solutions.
The rise of environmental, social and governance (ESG) factors as a valuable investment consideration continues to gain importance around the globe. Over the last few years, the number of available ESG-integrated funds has risen, accessibility has improved and investor interest continues to grow. Furthermore, for financial professionals in certain jurisdictions around the world, the need to address sustainability preferences within client recommendations is being formalized through regulation.
Despite these developments, at times it can be a nuanced process for financial professionals to assess clients’ interest in ESG. Building on the foundation set out in part one of our ESG 101 series, here we look at how financial professionals may want to gauge their clients’ values and match them to the growing number of ESG solutions.
A New Era of Investment
Global events over the past two years have caused a shift in public discourse that has made its way into boardrooms and financial markets, directly reflecting changes in consumer and investor expectations.1 From Bank of America’s billion-dollar pledge to advance racial equity and opportunity, to Netflix allocating 2% of its cash holdings into financial institutions that directly support Black communities, to activist investors enforcing change at major energy companies like Exxon,2 we have seen corporations across multiple industries respond to seismic social and political change.
Heightened public awareness of how financial markets affect society and the world around us has also influenced what clients expect from their financial providers. While financial outcomes will continue to be the primary component of financial professionals’ value proposition, many clients also want to know how their investments relate to the values they hold dear and how they can shape the legacy they leave behind. Thus, financial professionals are faced with an opportunity to strengthen their client relationships by better understanding what motivates individual investors.
Going Beyond the Typical Client Profile
For financial professionals, gaining an understanding of clients’ goals through open and ongoing dialogue is an essential part of the job. Historically, these conversations have been focused on financial profiling, which includes understanding a client’s risk tolerance, long-term financial goals and plans for major expenditures such as home buying or sending children to college.
While these remain important topics, to better understand a client’s appetite for ESG-focused solutions, financial professionals can also consider incorporating profiling strategies that uncover client values and aspirations beyond traditional life events. This approach will often reveal opportunities to strengthen the client relationship and better personalize investment solution recommendations.3
Importantly, this type of client profiling conversation does not need to be filled with ESG and sustainability jargon; rather, it can center on open-ended questions and active listening that allow financial planners to get a holistic view of their clients’ objectives and motivations.
Questions could include:
- How do you picture your life in the future?
- What are your biggest concerns about the future outside of your financial situation?
- What charities or philanthropic interests do you have?
- What do you want your legacy to be?
- Who are your heroes?
- What kind of education would you be most excited to fund?
- Where are you most excited to go on your retirement travels?
Questions along these lines – or even simply asking, “What are your values?” – are useful for opening up conversations that can offer better insight into a client’s interest in ESG issues and reveal views that go beyond investment objectives.
Connecting Clients to ESG Solutions
While these values-focused conversations may not always lead to a client opting for an ESG investment, they can position financial professionals to offer more individualized solutions. That said, with the breadth and depth of ESG options that are becoming available, these discussions are increasingly likely to reveal opportunities to make recommendations that can support investors’ interest in ESG – especially as that interest is growing rapidly. As we discussed in part one of this series, research indicates that, in some cases, financial professionals may be underestimating their clients’ levels of interest in ESG.4
So what can financial professionals do on a practical level to introduce ESG in conversations and match their clients with appropriate solutions? In our view, building foundational knowledge and customizing investment solutions based on client profiles are two effective starting points.
Beyond general interest in ESG themes, retail investors will often look to their financial professionals to help them navigate these emerging investment trends and better understand the solutions available to them. With so many different ESG offerings and labeling systems, providing education about the risks and opportunities of these various approaches can help boost investors’ confidence in adopting more ESG-specific strategies in their portfolios. Financial professionals who anticipate their clients will be interested in ESG can begin building foundational knowledge via resources such as reports from their asset manager partners or other industry experts.
In addition to helping them understand the ESG landscape, adjusting to clients’ varying levels of experience with or interest in ESG may also help financial professionals add a layer of tailoring to their client offering. ESG investing represents a broad range of investment strategies, which in turn allows financial professionals to accommodate a full spectrum of investor preferences and beliefs.
For example, clients who are more focused on returns may question how ESG could impact performance and may be reluctant to change their investment approach. With these clients, it may be best to focus the conversation on strategies or funds with a best-in-class approach. As we explored in part one of the series, the best-in-class approach keeps a broad investment universe but focuses on reducing portfolio risk by seeking companies positioned for long-term success based on both financial and ESG sustainability. The best-in-class approach can maintain a sector-agnostic investing approach while seeking to identify the ESG outperformers within those sectors.
On the other end of the spectrum, some clients will approach ESG with a high level of conviction. Transparency and collaboration will be key to productive relationships with these more proactive and informed clients. Financial professionals should be prepared to face more nuanced questions, as well as potential requests for bespoke ESG solutions such as investing according to a particular theme. In these cases, it will be necessary to determine which asset managers have the capabilities and offerings that will make it possible to cater to these requests.
Recent geopolitical and socioeconomic events have led to changes that now permeate all aspects of our lives, including our personal finances. At the same time, climate change risks have intensified and are likely to grow over time. Amid such disruption, investment returns will always remain the key objective for investors – but the process through which those returns are achieved is broadening in scope. This presents an opportunity for financial professionals to provide a differentiated approach by supporting clients with both wealth generation strategies and ESG-aligned solutions that can address global sustainability challenges.
Although conversations around ESG investing may seem difficult to initiate, they can be instrumental in helping financial professionals forge stronger client relationships while offering investors the opportunity to build a more individualized and impactful portfolio.
1“These are the corporate responses to the George Floyd protests that stand out.” JUST Capital, 30 June, 2020.
2“Exxon’s board defeat signals the rise of social-good activists.” The New York Times, 9 June, 2021.
3“Sustainable Investing for Advisors: Having Better Conversations with Clients.” Fidelity Institutional Insights, 2021.
4"Asset Managers and Advisors May Be Overlooking Retail Investors’ Appetite for ESG Investing." Cerulli Associates. April 2021.
Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than, the broader market.