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Life Health > Running Your Business > Selling

Why It’s Time to Discuss ESG with Your Clients

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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

When discussing ESG investing with clients, advisors must be transparent about both the potential upsides and downsides.

The main upside with socially responsible investing is that investors do not feel as though they’re harming the world around them.

With sustainability investing, investors focus on supporting the companies and industries they believe will make the world a better place.

The main downside is that, as I mentioned, ESG portfolios only have about 95% of the “Legos” that regular portfolios do. This means that ESG portfolios will always perform differently than non-ESG portfolios over time.

It’s especially hard for ESG portfolios to include investments from developing countries, which will likely grow in importance in the coming decades.

The point of this openness is to empower clients to make the best choice for themselves.

My firm is run on the values of Education, Choice, Transparency and Empathy. We teach clients about their options and then honor the decisions they choose. Each client gets personalized recommendations based on our relationship with them.

Ultimately, only about 1 in 25 of my clients select ESG portfolios. But for some advisors, especially advisors who specialize in ESG investing, the numbers will be far higher.

Every advisor has their own approach to ESG, but the time of not talking about it with clients at all is coming to an end.

Many advisors, myself included, believe clients should ultimately decide what happens to their own money.

For those advisors, now is the time for some ESG education so clients can make their choices knowing all of their options.

Tim Clairmont (Photo: Clairmont)Tim Clairmont CFP, MSFS, is the founder and CEO of Clear Financial Partners, a holistic financial planning firm serving pre-retirees and retirees in the Pacific Northwest. He is ranked as a Top of the Table member of the Million Dollar Round Table.




(Photo: Shutterstock)


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