How ESG Strategies Can Make a Big Impact for RIAs and Clients
Forget Bitcoin and the GameStop/Reddit frenzy. The trend RIA firms need to pay the most attention to is the rise of ESG strategies.
ESG (Environmental, Social, and Governance) investing—also commonly called sustainable investing, impact investing, or socially responsible investing (SRI)—isn’t new. But both the current value of assets and projected amount of assets invested in ESG strategies can’t be ignored.
Citigroup projects that more than $1 trillion will be invested in ESG-friendly ETFs by 2030—a stark rise from its previous prediction of $300 billion.
With surveys increasingly suggesting that investors—including high-net-worth ones—want advisors who at least offer the opportunity to use ESG strategies, should your firm incorporate them? The answer is an overwhelmingly yes.
ESG Strategies Show Rapid Rise in Popularity
ESG investing is hitting a massive wave of popularity, and numerous major trends are driving the demand.
Millennials, Gen X, and Women Investors
Millennials and GenXers are slowly becoming the predominant investors. Younger generations are set to inherit $59 trillion assets between now and 2060 and tend to be more impact-focused. According to a study from Fidelity Charitable, 77% of affluent millennials and 72% of Gen X investors have made an ESG investment, compared to only 30% of affluent baby boomers and older generations.
Women are also twice as likely to consider social responsibility alongside return when investing. This should stand out for RIA investors who want to keep clients as wealth and assets transfer to the next generation, since women and adult children (who are probably Millennials or GenXers) are the most likely to inherit those investments.
Data from InvestmentNews and Financial Advisor magazine, respectively, show that two out of three adult children and 70% of widows switch advisors after they inherit wealth—mostly due to differences in investment goals.
But younger generations and women aren’t the only ones seeking ESG strategies. In one recent survey, 76% of investors said that environmental, social, and governance issues should play an important role in the construction of their portfolios. Among high-net-worth investors who responded to the survey, 70% said that they would take an advisor’s ESG practices into consideration when choosing whether or not to work with them.
Impacts and Returns
While making an impact for the causes you believe in sounds great, every investor still wants to generate returns.
Contrary to what most advisors might think, research shows that ESG strategies don’t sacrifice on performance and often perform better than traditional investments.
A University of Hamburg and Deutsche Asset Management meta-study of over 2,000 academic ESG performance studies found that 88% of companies with robust sustainability practices demonstrate better operational performance and cash flows, 90% demonstrate that prudent sustainability practices have a positive influence on investment performance, and, on a whole, companies with high ESG ratings tend to have a lower cost of capital.
Perhaps most significantly, at the beginning of the COVID-19 pandemic, it was ESG investments that performed better than most.
Talking to Clients About ESG Investing
As the data shows, the days of clients not caring about the companies they are investing in are over. Investors want your help to achieve certain impact goals while still generating financial returns. Growth-focused RIAs should prepare themselves to talk with clients about ESG strategies.
When Clients Suggest ESG Investing
Clients may have a specific reason for requesting an ESG investing strategy. They may have heard about it on the news or maybe they have a specific value or belief they want to address.
For example, your client may want to exclude alcohol, gambling, and oil securities or only include investments in companies that focus on animal welfare and green initiatives.
Listening to your client will help you address how their current strategy does or doesn’t line up with their proposed ideas.
Suggesting ESG Investing to Clients
Instead of waiting on your clients, however, demonstrate your value as an advisor by suggesting a look at ESG investing strategies.
Start by giving clear definitions of what ESG strategies are and how your client could incorporate them. You can then explain why you want to talk through this. As a fiduciary, it’s your responsibility to educate clients about trends they are discovering.
You may have also remembered your clients talking about an ESG preference previously, in which you’d want to let them know that it is an option now. Either way, it’s best to explain how ESG can fit into the client’s risk profile and investing plan, and then ask if they feel like this is something they want to explore.
Adding ESG Strategies to Your Firm
Because more investors are interested in ESG strategies, it’s important for advisory firms to consider adding them. There are various ESG ETFs that allow you to quickly discover an appropriate theme for client investments.
If you decide to manage ESG investing, direct indexing can be helpful. Direct indexing allows you to offer customized portfolios that accommodate specific investment objectives without adding a huge load of time to your team’s task list.
Interested in a more robust and expert ESG strategy? Orion Portfolio Solutions has numerous third-party partners you can explore. We can quickly become the ESG partner you didn’t know you needed.
Ready to learn more about ESG investing and its impact on your clients? Download our new ebook to learn what steps you should take to implement an ESG policy in your advisory firm.