As the framework for environmental, social and governance investing has made strides in recent years, investors equipped with better data and lower-cost funds increasingly are turning to sustainable solutions to manage risk and align their portfolios with their values.
Between 2017 and 2019, ESG investing grew by more than a third to $30 trillion-plus, which represents over a quarter of the world’s professionally managed assets. By some estimates, it could reach $50 trillion over the next two decades.
Now, in the face of a global pandemic, new light is being cast upon the ESG landscape -- pulling the “S” and “G” attributes into sharper focus as more investors examine their investments through sustainable criteria.
While the potential benefits of ESG investing become clearer by the day, the path clients should take isn’t always obvious. This is an opportunity for advisers to add value through education and guidance. Effectively integrating ESG strategies into portfolios requires a client-centric approach that:
Prior to finding suitable solutions for clients, we must first have a clear understanding of their long-term goals and how ESG investing fits into their plans and objectives. Are they motivated by the desire to manage risk, express their values or pursue sustainable performance? Once you establish a clear understanding of their specific goals, create opportunities to share knowledge and work to identify ESG strategies that are most closely aligned with their desired outcome.
There is no one-size-fits-all approach to how an investor can pursue the value that ESG investing can add to portfolios. Before integrating ESG strategies, assess the current asset allocation within the portfolio and be mindful of keeping investments properly balanced to avoid unintentionally introducing sector or style biases. Is ESG all or just part of a client’s portfolio allocation? Determine the degree of ESG integration a client wishes to incorporate and establish a clear understanding of their desired outcome. Lastly, review personal values and risk frameworks with clients to help them better understand ESG investing considerations.
Recent studies suggest that portfolios with ESG integration may provide downside protection when markets are struggling, underscoring ESG’s potential role as a long-term investment. It’s pivotal to understand clients’ time horizon, their definition of success and how it will be measured. Consider the client’s perspective, align expectations with outcomes and reporting, and adapt portfolios as motivations change. The increased transparency and improved reporting help investors to better understand their ESG exposures, take action to achieve their investment goals and monitor progress.
At State Street, we believe the economic reset exacerbated by coronavirus, coupled with the long-term benefits of ESG investing and ongoing wealth transfer from boomers to their children, will continue to support ESG adoption, driving ESG exchange-traded fund assets from $170 billion as of May 31 to more than $1.3 trillion by 2030.
Whether clients want to match investments with their mission or pursue enhancing long-term performance, ESG investing can help meet their goals. And for advisers, it represents an attractive opportunity to position practices for continued success in the future.
Brie Williams is head of practice management at State Street Global Advisors.
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