Why It's Time to Discuss ESG with Your Clients

What You Need to Know

The investors who focus on ESG strategies are enthusiastic.
Older investors are about as likely to make ESG issues a priority as younger investors.
One challenge is obstacles to giving ESG portfolios enough exposure to developing countries.

Within the world of financial services, the rising interest in environmental, social and governance (ESG) investing has become impossible to ignore in the past few years.

More and more Americans want assurance that their investments do not contravene their views of what would make the world better.

According to a 2021 Million Dollar Round Table survey, 34% of Americans with financial advisors are willing to sacrifice some return on their investments for the sake of incorporating personal beliefs into their portfolios.

The investors driving the ESG trend are still a minority. But they are a loud one, and loud minorities are the groups that typically drive change.

This means enthusiasm for ESG will likely continue to rise, and advisors must be ready to discuss it with their clients.

By educating clients about all aspects of ESG investing, we can empower them to make the best possible financial decisions while respecting their ethical values.

The State of ESG Today

Something that may surprise you: ESG is no longer a young investor’s game.

The MDRT survey, for example, found no age differences in willingness to sacrifice returns for incorporating personal values in investments.

I myself have several Generation X and baby boomer clients who have chosen to invest in ESG portfolios.

Additionally, Americans with advisors are more likely than those without to be interested in ESG (34% of Americans with advisors vs. 24% of Americans without one, according to the MDRT survey).

This is a good thing — advisors are supposed to help clients form opinions about finance, so stronger opinions among our client base means we’re doing our jobs.

On the supply side, ESG is much easier to work with than it was 10 or 20 years ago.

I use a Legos analogy to explain ESG to my clients. A decade ago, an ESG portfolio, or “Lego set,” would only have about half the Legos as a regular portfolio.

Today, that figure is closer to 95%, so ESG options can get much closer to fully replicating more traditional asset allocations.

The most popular ESG options remain focused on sustainability and socially responsible portfolios (no alcohol, tobacco or firearms). But other models like faith-based portfolios are also increasing in popularity.

Upsides and downsides