How to nail the ESG conversation with clients

A pivotal moment for ESG occurred in Dubai last month at COP28, the annual global summit on climate change: Developed nations, including the Gulf states, collectively agreed to transition away from fossil fuels. 

Jennifer Morgan, Germany's climate envoy, took the statement to its next logical step: "Every investor should understand now that the future investments that are profitable and long term are renewable energy — and investing in fossil fuels is a stranded asset."

This conclusion renders moot the almost exclusively U.S.-based opposition to using an environmental, social and governance framework for investing; such opposition focuses on the idea that minimizing investments in fossil fuels is an abdication of fiduciary duty. 

With such clear consensus to the contrary, the politically motivated push against ESG will eventually dwindle. Some powerful findings from a Bloomberg Intelligence survey underscore the clear truth of the situation: "The trend of increasing focus on ESG by businesses and investors over the past few years appears to remain intact, with around three quarters of executives reporting that the benefits of ESG are worth the increased risk of greenwashing scrutiny, and more than half of investors saying that the political pushback on ESG in the U.S. has actually led them to focus on ESG more than ever before."

Pretty cut and dried.

Evolving investment landscape

The reality is that despite sensationalist headlines and heated congressional hearings, all signs point to ESG becoming an increasingly ingrained element in the investment landscape. The proliferation of products embracing ESG principles is evident, with global asset owners integrating these factors into their lineups. Regulatory bodies like the European Commission are formalizing standards, and the U.S. Securities and Exchange Commission is shaping its guidelines for investors and corporate reporting.

Yet when it comes to sustainable investing, financial advisors (yet again!) find themselves at a crossroads. For financial advisors the challenge is nuanced. Firms large and small struggle with the issue of how to talk to clients about ESG. As we enter 2024, a wide cross section of investors expects access to financial options that consider environmental, social and governance factors. The hard part? Figuring out not only how to incorporate sustainable investing vehicles into a portfolio, but also how to address the offerings with clients in a way that is honest, informed and brings value to the business.

READ MORE: The battle for the soul of ESG

The basics of ESG

First things first. It is crucial for clients to understand what ESG is and what it is not. Contrary to dramatic political rhetoric, ESG is not an agenda forcefully imposed on investing. Instead, it provides valuable data, enabling analysts and investors to make informed decisions by assessing a company's performance across environmental impacts, social responsibility and corporate governance. ESG does not dictate specific investment choices but empowers stakeholders with insights to align their portfolios with values and risk considerations, fostering a more responsible and holistic approach to investing.

ESG in isolation does not equate to sustainable investing, socially responsible investing or impact investing. Rather it serves as a tool that, when combined with other inputs, can be used to pursue an approach that resonates with clients while staying true to fiduciary responsibilities.

Check yourself

Some advisors are looking to make a statement with their practice. Others are working within the broader construct of a large firm. Others just want to ensure their clients have access to the style of investing that suits them best. 

Knowing what you hope to achieve will help you determine how to talk about sustainable investing with clients. If you and your clients are passionate about driving change, for example, you may lean toward socially responsible investing, which favors excluding companies or sectors you find objectionable (think big tobacco and firearms). 

It's important to understand the nuances of the terminology. That can be a tall order, given the proliferation of acronyms. If you start with your own goals and focus, though, it will be easier to avoid drowning both yourself and your clients in alphabet soup.

Eliciting values

Having worked with dozens of financial advisors over decades, a consistent desire stands out — the passion to connect with clients about financial and life goals, transcending the mere numbers in quarterly statements. Advisors want to know about the grandchild heading to college, the dream house on the beach and philanthropic pursuits.

READ MORE: Meet the CSRIC, a tool to aid clients with sustainable investing

Client values that can be associated with sustainable investing are a natural, easy corollary to that conversation. What subjects are they most connected to? Are their children concerned by climate change? Gender equality? Human rights? These issues and many others are part of the puzzle and are increasingly reflected in corporate reporting.

Letting clients know that their personal values can be part of their investment strategy, while still pursuing the same financial returns, can be a powerful aspect of the client-advisor relationship.

The sustainable investing world may still seem uncertain or foreign to some advisors, but embracing the discipline can lead to meaningful client relationships and long-term success. Financial advisors who approach the ESG conversation with clarity, align with client goals and foster open dialogue will find themselves well-positioned for the future. As sustainable investing continues to gain traction globally, you can be there to help your clients on an even deeper level than before.