Despite now being ubiquitous, the acronym "ESG" didn’t enter the lexicon until 2004, when then-United Nations Secretary-General Kofi Annan launched an initiative exploring ways to integrate environmental, social and governance issues into capital markets. The resulting UN Global Compact initiative, titled Who Cares Wins (WCW), was endorsed by 23 financial institutions collectively representing more than $6 trillion in assets.
Although it emerged as an offshoot of socially responsible investing, a centuries-old investment approach prioritizing principles above all else, ESG was never intended to be about investing purely for ethical or moral reasons. Instead, the WCW report argued that companies effectively managing ESG issues might be better positioned to navigate increasingly complex regulatory environments, reduce future costs and preserve reputations—therefore materially increasing shareholder value over the long term. Somewhere along the way, though, this message has been diluted and hijacked.
That’s in part because ESG investing as a concept remains somewhat nebulous. While the acronym broadly refers to the accumulation and application of data related to companies’ environmental, social, and governance practices, data providers have diverged in their qualitative assessment of that information and its relevance to a company’s bottom line. Absent a global standard for data collection and reporting—as well as the reality that ESG issues are inherently interlinked and thus not easily classified as “E”, “S” or “G”—skepticism has been bubbling beneath the surface.
Determining Drivers of Demand
In recent years, various opportunists have seized on the ESG movement’s shortcomings to position it as politically motivated. Still, investors increasingly find the simple idea of balancing financial gains and personal values a compelling one. In one Morgan Stanley study, 84% of respondents expressed interest in products that enable them to bring their investments in closer alignment with the issues they care about most—a number that spiked to 90% among millennial respondents. Corroborating this further, Nuveen found that 96% of millennials expect their advisor to be knowledgeable about sustainable investing strategies. The findings are clear: clients generally want to know that their money isn’t being funneled to companies whose practices are antithetical to their values. And advisors ignore this conviction at their peril—research suggests there is a sizable disconnect between investors’ interest in values-aligned investment solutions and advisors’ perceptions of demand.
There’s not a single factor that’s driving this demand, either: each investor is unique and has their own specific motivations for pursuing ESG integration. For some, it is driven by deeply held personal values and a desire to drive positive impact in the world. For others, it’s about pragmatically reducing ESG-related risks and achieving long-term capital appreciation. And then there are the investors that fall somewhere in between. One thing is certain, though: the onus is on the advisor to uncover the client’s values, ideals and goals, or they risk losing out to a competitor that has no qualms about broaching this conversation.
Identifying Hidden ESG Investors
We all have values that drive our decisions in life, influencing everything from the food we eat to the relationships we establish. What if, instead of dancing around the ESG conversation, an advisor were to simply ask their client, “Would you like to align your portfolio with what’s important to you, all without sacrificing returns?” The answer will likely almost always be “yes.” That's why it all lies in the framing—it’s mission-critical for advisors to ask the right questions if they are to form meaningful, sticky client relationships.
However, the politicized rhetoric around ESG has meant that many advisors are hesitant to initiate these conversations, surmising that certain clients will not be a good fit. Take the example of a client who’s an avid hunter—sure, they’ll probably never embrace veganism or join the anti-gun lobby, but they may well be incredibly passionate about conserving land and promoting biodiversity. Advisors might even encounter a client that has openly expressed skepticism about the term ESG and yet, ironically, wants to avoid investing in companies known for poor governance decisions. Or perhaps their roster includes a busy executive who certainly doesn’t stay up at night worrying about conservation efforts but understands that environmental transgressions represent a clear material risk to the companies within her portfolio.
BP’s 2010 oil spill in the Gulf of Mexico offers one such jarring, real-world example of how egregious and willful disregard for worker safety and environmental protocol can have tragic and financially material consequences. Gross negligence on BP’s part led to the largest oil spill in U.S. history, causing the deaths of 11 employees as well as lasting environmental impacts. BP ultimately plead guilty to 14 criminal counts, including those for felony manslaughter, but that wasn’t the end of this sorry saga. More than a decade after the spill, the financial fallout continues to haunt the oil major: its civil and criminal liabilities total almost $70 billion and counting. Viewed through this lens, what reasonable investor would want to be exposed to this kind of avoidable loss?
Initiating the Values Conversation
By striking up proactive conversations to engage with investors on their values and wealth goals—and then meaningfully connecting them to customized investment solutions—advisors are better positioned to deliver a more effective financial plan and dramatically strengthen the advisor-client relationship. When asked to speak on issues they care about, most people light up and are happy to elaborate. Advisors that see past the sensationalized headlines and engage in active listening to simply elicit their clients’ priorities, will undoubtedly be better equipped to serve them.
This conversation needn’t be awkward or unnatural, either. In fact, advisors’ everyday interactions with clients likely provide a plethora of useful clues as to their priorities. Have they pursued a career in public health, cleantech or education? Do they regularly donate to charities that are addressing global poverty? Did they recently purchase an electric or hybrid vehicle? Do they enjoy spending their leisure time engaged in outdoor activities such as scuba diving, hiking or surfing? These indicators, and others, can help advisors tap into clients’ passions and lay the groundwork for a meaningful discussion about how best to align their money with their mission. The reality is that if you’re not talking about values, another advisor is, and you stand to lose out on business as a result.
Zach Conway is co-founder and CEO at Seeds Investor, a technology platform that empowers advisors to deliver a more intentional and personalized investing experience.