Debunking ESG Myths Part 2: The Future of ESG Investing
In part two of this three-part blog series, learn more about why ESG investing is more than just a trend and why clients need your help to get started.
In part 1 of our 3-part debunking environmental, social, and governance (ESG) myths blog series, we talked about the myth of investors needing to sacrifice financial portfolio performance with ESG investing. The fact is that ESG investing can not only lead to higher or equal financial returns but is also a good insight into the market’s risks and opportunities as we navigate the future of the financial market.
In part 2, we analyze the future of ESG investing, diving into the biggest myths around its longevity and client interest. As an advisor, it is crucial for you to understand the myths your clients might be holding onto when it comes to ESG investing. By starting the conversation about ESG with your clients, you can demonstrate its value while improving your client relationship through greater customization.
Here are four myths about the future of ESG investing and the facts you can use to debunk these in your next client call:
- Myth #3: ESG investing is just a trend
- Myth #4: My clients don’t care about ESG
- Myth #5: Only millennials are interested in ESG
- Myth #6: ESG investing is only about the environment or screening out “sin” stocks
Myth #3: ESG investing is just a trend
Fact: ESG investing is part of a shift in the investment landscape. You can expect its influence to grow, not fade away.
Client talking points:
ESG investing has historically been a niche investment strategy. Advertised often as a specialty product rather than a service, it’s no surprise that some clients, and advisors, see ESG as a fad or trend with very little long-term future.
Instead, what we are seeing is a shift in the investment landscape. The link between sustainability and financial services is far more connected than ever. According to PwC, that boundary between traditional and sustainable investments will all but disappear by 2022. What we are experiencing is a post-fund paradigm shift with ESG investing right at the center.
This shift is the result of many factors including:
- Demand for greater personalization and customization in the market
- Advances in cost structures and technology
- Increasing regulatory momentum and pressure
- ESG’s demonstrated outperformance in the market
- Escalating environmental, social, and health crises creating pressure for needed change
As we navigate this post-fund future with the rise of direct indexing, this moves financial services towards greater customization and flexibility — resulting in the integration of ESG as a feature of your offering instead of a niche or specialty product.
The US SIF’s 2020 Trend Report outlines how we’ve seen a 42% increase since 2018 in investors considering ESG factors. That’s $17.1 trillion at the start of 2020 compared to $12.0 trillion at the beginning of 2018. Today, close to one in three dollars of US-domiciled assets under management are using sustainable investing strategies. That number is only going to continue to grow.
Image source: US SIF Trends Report 2020
As sustainable investing grows and millennials and Gen Z come to represent a larger and larger share of the wealth management client base, adapting to their well-documented preference for values-based investing is critical to maintaining market relevance. A conversation with these and other clients on their values, interests, and goals can not only help you build a better relationship but can also help you dive into the opportunity areas for personalization in your business.
ESG is a key long-term trend. It will only continue as the younger generations inherit an unprecedented $30 trillion. The question is no longer about whether ESG is here to stay but about what you plan to do about it. As an advisor, integrating customization and values-based investing into your service offering will be vital for your business.
Myth #4: My clients don’t care about ESG
Fact: Most of your clients care about ESG. The issue is not that they don't care — it’s that they aren’t always offered the opportunity.
Client talking points:
85% of the general population has an interest in sustainable investing. 84% expressed an interest in products that align their investments with the causes they care most about. When we talk about millennials, that number is even higher. 95% of millennials have an interest in sustainable investing. 90% would love help in aligning those values to their investments.
When it comes to actual action, 52% of the general population and 67% of millennials participated in at least one sustainable investing activity in 2019. These statistics should tell you that most of your client base cares about ESG, and at least half are already incorporating sustainable investing into their strategy.
Source: Google Trends search for “ESG Investing”
The disconnect between action and interest for some of your clients is not a lack of caring but a knowledge gap. If you feel your clients don’t care about ESG, is it because you’ve heard that directly from them? Or is it because you haven’t discussed ESG with them at all? For most advisors, it’s the latter. Most clients don’t even know that they can ask about ESG and might not be aware that it is an option. Make sure you aren’t confusing a lack of information and access with a lack of interest.
In a survey done by New York Life Investments in 2019, only 20% of investors surveyed said their financial advisor offered them an ESG-based investing strategy. This begs the question, are investors not interested, or are they simply not provided the opportunity?
Yes, your clients care about strong financial performance. But what if you could offer them strong performance plus the opportunity to customize their portfolio around their interests and values easily? The numbers show that most of your clients would say yes to that offer.
As an advisor, this is your opportunity to fill that knowledge gap. Educating your clients around the potential portfolio performance opportunities of ESG and the tangible impacts of their investments helps them overcome any hesitations they might be facing. Only by starting the conversation can you understand if there is an actual lack of interest or just a lack of information.
Myth #5: Only millennials and women are interested in ESG
Fact: Investors from all generations and genders are increasingly interested in ESG investing.
Client talking points:
85% of the general population has an interest in sustainable investing. While we like to talk a lot about millennials driving that interest forward — and they certainly have played a significant role in its trajectory — it’s actually baby boomers and Gen X who are the current drivers of ESG investing.
According to The Fifth Annual Responsible Investing Survey, 39% of Gen X, 24% of baby boomers, and 22% of millennials asked about sustainable investing in 2019. Even if millennials are the most interested generation, older generations are more likely to act on that interest.
While women have historically been more likely to factor sustainable investing into their investment decisions, that gap has all but closed recently, according to Morgan Stanley. The gap between men and women has dropped from a difference of seventeen percentage points in 2017 to only three percentage points in 2019.
Investors from all generations and genders have an interest in ESG investing. As we continue to see the rise in ESG interest from the general population, we can no longer assume that this interest comes only from younger generations or women. Everyone’s motivations for investing are different — it’s time to have these conversations with all your clients.
Myth #6: ESG investing is only about the environment or screening out “sin” stocks
Fact: There are infinite combinations for ESG investing, and the options are growing, not shrinking. Today, you can invest according to much more than just the exclusion of “sin stocks” or environmental criteria.
Client talking points:
The exclusion of “sin stocks” harks from the earlier days of sustainable investing. Today, ESG investing is about customizing a portfolio according to your interests and values, not just excluding tobacco, alcohol, or contraceptives. There are many different ways you can customize your portfolio through ESG investing.
The myth that ESG is only about the environment, leaving out the S and G factors (social and governance), most likely stems from the fact that environmental criteria have grown much faster than social or governance factors. Environmental criteria are at the forefront due to increasing climate change risk and discussion. In the past two years, environmental criteria have increased 57% from $10.1 trillion to nearly $16.0 trillion.
Although environmental criteria make up a big part of ESG investing, there are also governance and social factors that an investor can think about when constructing their portfolio. For example, governance factors can include corporate political contributions or ethical supply chain management, while social factors can include LGBTQIA+ rights or racial justice.
ESG investing with DCIs (“Direct Custom Indices”) is a way to customize your portfolio according to your values, interests, and goals. It includes a wide variety of options outside of just “sin stocks” or environmental criteria.
For example, let’s say your client works at Facebook and is highly exposed to Facebook’s and overall tech sector’s financial performance. You might want their portfolio to exclude Facebook. Maybe they were at the Women’s March, and they want their portfolio companies to respect and promote gender equality. They also care about climate change and want their portfolio to reflect that. On top of that, they would prefer the corporations they hold to not make secret political contributions to candidates and causes they don’t support.
As you can see, there are infinite combinations for ESG investing, and you cannot create those types of customizations using funds alone. It all comes down to your client’s individual preferences, not a narrow window of exclusion funneled through the environment or “sin stocks.”
As an advisor, this is where your advantage comes into play. Imagine easily building factor portfolios that only you can offer. By personalizing portfolios according to your client’s interests, you capture that value in the form of client acquisition and retention.
The future is bright for ESG investing
ESG investing is one of the fastest-growing investment strategies in the United States and across the world. According to the U.S. SIF 2020 Trends Report, investors are considering ESG factors across $17 trillion of professionally managed assets — a 42% increase since 2018 and represents about a third of U.S. assets under management.
The growth of ESG is further emphasized with the EU unveiling new ESG rules through the Sustainable Finance Disclosure Regulation (SFDR) and the Biden administration putting more U.S. ESG-related regulations in place. ESG is no longer a fad or a trend. It is the future of the financial services industry. As an advisor, it’s essential to understand the myths that might be holding you or your clients back from ESG and take the time to start the conversation today.
Learn more about talking to your clients about ESG investing and how to get them on board. Plus, stay tuned for part 3 as we break down the back-office operations of ESG investing. For a refresher on the myths of financial returns for ESG investing check out part 1 of our debunking ESG myths blog series.