Despite ESG investing becoming more mainstream, discussing sustainable investing with clients can be challenging for financial advisors. For one thing, ESG investing is massively complex. It comes with its own jargon and terminology that can be daunting to newcomers. Plus, there’s no consensus within the industry as to what ESG’s core features are.
Morningstar recently conducted some studies to examine how investors approach the subject depending on the information they’re given. And while there’s no one-size-fits-all approach to sustainable investing, the financial research firm offered four key takeaways that financial advisors should keep in mind when broaching the subject of ESG to their clients.
For Most Investors, Financial Needs Come First
Morningstar conducted a study wherein participants were asked if they’d like to enroll in a traditional 401(k) retirement plan after being given select information about said plan. If they decided to participate, they were then asked how much they’d like to contribute.
Participants were assigned to one of seven conditions that determined what information they received. Four of the conditions provided sustainable investing information. Participants given information about sustainable investing and those briefed on shareholder participation were less likely to participate in the plan, and those who did participate contributed less.
In a follow-up study, Morningstar introduced sustainable investing through a sequential approach. All participants were first presented with a standard 401(k) plan description and asked if they wanted to participate, and at what contribution rate. Morningstar then presented additional sustainable investment options.
The negative impact of the sustainable options was mitigated through this approach. For many investors, making sure that a plan meets their financial needs is still their top priority.
Investing Decisions Are Already Complex and Difficult for Many Investors
The research also shows that for many investors, investing decisions are difficult, which could be why participation rates in retirement plans are so low. While many investors may be interested in sustainable investing, financial advisors must be careful not to overwhelm their clients when introducing this topic.
Different Types of Sustainable Investing Will Elicit Different Reactions
Morningstar found a small connection between the contribution rates and the political ideology of participants in the arm focused on using sustainable investing and managing ESG risk. The more politically conservative participants contributed less to the plan.
Many Investors Don’t Have a Clear Idea of What ESG Investing Can Offer
Considering the numerous approaches to sustainable investing available, many investors may not completely understand all of the ESG strategies at their disposal. So, many investors may not have a strong preference towards any sustainable investment strategies. But this can change once investors learn more about them.
“Altogether, our findings indicate that investors continue to prioritize their financial needs first when considering an investing opportunity, which is not too surprising,” writes Samantha Lamas, a behavioral researcher at Morningstar. “However, given the promise and wide-reaching benefits of sustainable investing, many investors may be interested in all it has to offer.”
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