How to help clients meet their ESG needs

ESG — environmental, social and governance — is the business buzzword of the minute.

The Paris Agreement and climate crisis, and social issues such as fair wages and safe working conditions, have made many investors realise the power their money holds.  

Now, growing numbers want to reap the benefits of investments and do something genuinely good — or, at least, stop contributing to society’s most pervasive problems.

What is ESG? 

ESG, or environmental, social and governance, is a business term that covers actions like accountability, sustainability, diversity and equity.

In investing, it’s become a catch-all term for investments that have a broadly positive impact on the world around us.

ESG is a broad topic, which can cover everything from: 

• Sustainability and environmental concerns, like carbon emissions and air and water pollution
• Human rights
• Gender and race equality
• Anti-slavery and better supply chains
• Fair pay for workers
• Health and safety
• Investing back into communities 

What is ESG investing? 

As the climate crisis intensifies, more people are looking to use their money for good and move away from supporting businesses that are harming the world and societies around us.

ESG investing allows investors to support positive causes while still potentially growing their wealth for the future. 

Though the first sustainable fund launched in the 1970s, ESG investing has exploded in popularity and fund availability over the last decade.

CNBC found that, in 2020, investors put $51bn (£42bn) into sustainable funds, compared to $5bn (£4.15bn) just five years ago.

ESG factors are no longer a nice-to-have for investors, particularly younger ones — but many simply don’t know where to start.

Do people want to invest responsibly? 

An Invesco survey found that 90 per cent of under 45s want to make responsible investments.

Yet just 14 per cent say they understand the term ESG, leaving many conscientious investors confused about where to start.

As an adviser, you may also be unsure about how to approach the topic with your clients, and make sure you’re balancing financial performance and ethics.   

It's important to understand why your client is considering sustainable investments.

The Schroders Global Investor Study 2018 (GIS), which asked thousands of people across 30 countries about sustainable investing, found the main reason for investing in ESG was to make bigger profits.

Other investors put their impact before their profits, prioritising impact over returns.  

Investing can be confusing to the uninitiated, let alone when you add ESG into the mix, so it’s up to you to help your clients start investing with heart. 

What are the misconceptions? 

Historically, some investors believed that ethical investments didn’t perform as well as investments based purely on financial performance.

Now, with ESG a mainstream consideration for all companies and fund managers, this is not the case. In fact, Invesco revealed that some ‘responsible’ funds (broadly focused ESG funds) outperformed non-ESG funds in 2020.  

As an adviser, it’s your job to dispel client worries by using data.

Though past performance isn’t an indicator of future returns, showing that ESG funds and other responsible investments have the power to financially compete with non-impact investments will help reduce misconceptions.

Creating an ESG advisory framework 

First, gauge your client’s appetite for risk and how hands-on they want to be, as you would before offering any investment advice.

As with any other type of investing, there are options that are inherently risky and others that offer a relatively high chance of generating good returns.

For example, investing directly into an enviro-tech start-up is a high-risk action, while investing in a broad ESG-focused fund or trust has much lower risks.  

Just asking your clients ‘do you want to invest responsibly?’ isn’t enough to truly understand where they want their money to go. ‘Responsibly’ could simply be interpreted as above board, with clients happy to invest in oil, tobacco and weapons as long as it’s legal.  

ESG investors want to avoid these morally questionable sectors and contribute to more positive causes.

They are pragmatic, though, and many prioritise the return on their investment above all — particularly if they do not have large amounts of money to invest in the first place. 

Some will have specific motivations, such as investing in climate action or avoiding sectors like gambling that don’t align with personal or religious beliefs.

If your clients are investing through a corporate vehicle, such as their limited company, there may also be corporate social responsibility to consider. 

A simple way to understand what your clients want from ESG-focused investments is to ask a few questions before your consultation.

Here are some suggestions: 

• How much do you know about ESG?
• Do you want to avoid specific sectors or regions?
• Are there specific businesses you don’t want to support?
• Do you have religious or personal values that will affect how you invest?
• Do you want to avoid companies that are indirectly involved in areas you disagree with, or just those directly in the sector/region?
• Is there a specific area of ESG you’re most focused on, such as climate change, fair treatment of workers or gender equality?
• Are there specific ESG reporting standards your investments must stick to?
• Do you want your investments to have a specific, measurable impact as well as potentially generate returns e.g., help pay workers fair wages? 

Evaluating their ESG investment options 

Once you have a better idea of what’s important to your client, it’s important to make investing in the right causes as simple as possible.

Some investors have low levels of financial literacy and will rely heavily on you to recommend products that align with their financial and ethical goals.

Others are happy to be in control, but simply don’t know what’s out there.  

With most mainstream funds offering ESG options, and DIY platforms like Vanguard and Fidelity publicising responsible investments, there is more choice than ever for investors.

If you’re looking for a simpler way to connect with new clients, Unbiased is a reliable way to generate new leads.

Get in touch to find out more about how our platform for advisers works.