Features

Advisers should bring up ESG with clients, before they ask

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Become more knowledgeable about at least some ESG issues.

Not so long ago, analyzing investments through the lens of environmental, social and governance criteria was considered a fringe practice that appealed to a very small segment of the investing public.

[More: Why aren’t advisers warming up to ESG?]

Times have changed. ESG principles are now important to an ever-broader range of investors, and interest continues to grow, particularly as study after study shows that returns from ESG-oriented investing are comparable to investing conventionally.

Advisers, however, continue to lag their clients and institutional investors in the move to incorporate ESG criteria in general investment decision-making.

To be sure, the big money — institutional investors whose preferences generally are emulated by individual investors over time — now routinely consider ESG factors when investing.

US SIF, an advocacy group whose mission is to “rapidly shift investment practices toward sustainability,” said that cities and states responding to its most recent biennial survey reported a collective $2.9 trillion in assets (money in public treasuries and public pension funds) allocated to sustainable investing strategies, up from $2.62 trillion in 2016. In addition, a recent report by the management consulting firm Bain & Co. found that many private-equity funds are incorporating ESG goals into their strategies and that many are selling assets that do not meet those guidelines.

The retail public is increasingly interested in ESG as well. During the first half of the year, as InvestmentNews recently reported, $8.9 billion flowed into sustainable funds, topping the record $5.5 billion for all of 2018, according to Morningstar Inc.

Not only did the number of ESG mutual funds and exchange-traded funds grow by nearly 50% last year, to 351, but many funds that are not specifically ESG-focused are updating their prospectuses with language that suggests they also take ESG factors into consideration when making portfolio decisions.

Despite the growing interest, advisers still seem somewhat reluctant to embrace ESG investing. Last year, only 36% of advisers offered ESG investment options to clients, according to a survey by Nuveen, which is up from 29% in 2015, but still far from wholehearted support.

This year, InvestmentNews Research found that only 32% of advisers use ESG to attract new clients and only 25% utilize it to create a niche for their business.

The report, “Opportunity Knocks: How advisers can capitalize on growing ESG interest,” produced in conjunction with Calvert, found that while 84% of advisers say that social and environmental issues are important to their clients — up from 74% in 2017 — only 44% of advisers take ESG factors into account when constructing portfolios, which was largely the same as the percentage last year.

Often, advisers leave ESG discussions up to the investor. Only 21% of advisers said their firm is proactive in initiating ESG conversations, while 26%said clients initiate the discussion and 35% said it depends on the situation.

Advisers may shy away from leading discussions because many do not see themselves as ESG subject matter experts. Less than half (47%) say they feel knowledgeable about socially responsible investing.

The challenge for advisers, therefore, is to become more knowledgeable about at least some ESG issues and raise the subject with their clients, many of whom would welcome the discussion. Research has shown that while younger investors tend to be the most interested in ESG investing, there are investors in all age groups for whom all or some ESG principles are meaningful.

Some clients, for example, may care intensely about the environment, while others are concerned about workforce policies; governance issues may be of particular interest to certain fixed-income investors.

For advisers, the most important first step is probably just initiating a conversation with clients about whether ESG factors are important to them.