Advisors are the biggest obstacle to ESG investing – wealth management | Wonder Mind Kids

There is a growing segment of investors who want their portfolios to reflect their personal values. A recent study showed that 81% of investors want their advisors to discuss this type of alignment. But despite this trend, many consultants don’t talk to their clients about such opportunities, even though a product landscape has evolved significantly to provide personalization tools.

This trend – broadly defined as an environmental, social and governance approach – also goes beyond portfolio personalization and is creating real impact. Investors who embrace a sustainability philosophy have influenced corporate behavior – more than 90% of S&P 500 companies now voluntarily report on some aspect of sustainability, and many have set sustainability goals. Sustainability-minded investors have even changed the composition of the boards of global companies like ExxonMobil.

Despite increasing client demand and the proliferation of investment opportunities and products, many advisors are still not taking advantage of this opportunity to build their business. In fact, advisors are often the industry’s biggest stumbling block. Those unwilling to heed the demand for ESG risk losing clients to advisors committed to sustainable investing, particularly where wealth passes through generations. Several studies have shown that both women and younger investors are likely to be looking for a portfolio that matches their values.

Concessional Compromise

There is a common misconception that incorporating ESG values ​​into a portfolio or selecting ESG-sensitive investments means sacrificing performance. According to a Morningstar study of ESG index performance over the five-year period ended December 31, 2021, 80% of Morningstar’s ESG indexes with a five-year history have outperformed. Additionally, over the same period, 88% of Morningstar’s five-year history ESG indices lost less than their broad market equivalents in bear markets, as measured by downside capture rate.

While the vast majority of ESG approaches could perform well over time, investors should be aware that excluding a large number of companies and sectors from the investable universe is likely to result in increased tracking error. There’s no guaranteed return on ESG stocks or the promise that investing in these vehicles is “safer,” but the premise that socially responsible companies are lagging behind is a myth. The ESG category is broad enough that advisors should be able to identify ways to enhance returns while maintaining a portfolio that reflects the client’s stated values.

address customer priorities

A financial advisor’s primary role is to provide personalized guidance on the best investment approach to achieve a client’s goals – a process that is best accomplished when advisors take the time to ask the right questions to understand their priorities to understand. These detailed discussions enable the advisors to deliver a portfolio that reflects these values.

Because ESG scores can be highly personal—one client may prioritize environmental considerations while another values ​​diversity—it is important that these programs are not viewed as commoditized or one-size-fits-all.

It is unfortunate that ESG has become politicized of late, but it is important that key advisors put aside their political or their company’s views. Ultimately, it’s about personalizing portfolios to best fit a client’s values, and advisors should support that goal, not hinder it.

Define “good” and “bad”.

There is no industry standard for “good” or “bad” ESG, and customer criteria are varied and subjective. Even the largest ESG data providers cannot agree on a universal definition.

Identifying and researching investment opportunities is challenging, which makes it all the more important to listen to the client’s goals. Although the process has become easier for advisors, it still takes time to understand sustainability issues and become familiar with the tools available to evaluate different investments. This kind of commitment can make some consultants shy away from these opportunities.

Advisors should avoid making recommendations based on an ESG data provider’s “pillar score” and predefined ESG labels, and instead make investment recommendations based on the client’s priorities. That could mean proposing a stock or fund that prioritizes tackling climate change but doesn’t focus on employee engagement or corporate leadership. Let the client guide these investment decisions and personalize their portfolio to reflect the client’s values.

Addressing needs – shaping the future

The ESG field is constantly evolving and lowering the barriers to entry. Not only new trends are emerging, but also new products and assets. Advisors can offer tailored services and portfolios. Thanks to ESG reporting technologies, advisors can now provide clients with impact reports that compare a client’s ESG portfolio to a specific benchmark such as the S&P 500 or the Russell 1000. For example, an advisor could demonstrate its ability to significantly reduce the exposure to carbon emissions in an ESG portfolio versus simply owning the underlying benchmark index.

ESG is an opportunity for advisors to better serve their clients by aligning portfolios with what clients care about most. Let the values ​​of the customers determine where to invest and the result should be sustainable for everyone.

Bud Sturmak is Head of Impact Investing at Perigon Wealth Management. His comments are for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice or a recommendation or solicitation to buy, sell or hold any security.

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