How Financial Advisors Can Incorporate ESG Investing into Client Portfolios

Environmental, Social and Governance (ESG) investments are growing in popularity. Financial advisors can also help clients pursue their goals by effectively integrating ESG principles into a diversified investment portfolio.

“ESG enables clients to invest with greater precision — to apply a broader lens to more deeply analyze investments. Whether they want to match investments with their mission or pursue enhancing long-term performance, ESG can help meet their goals. It’s a new way of valuing the future,” Brie Williams, Vice President of State Street Global Advisors, Head of Practice Management for the Global SPDR Business, said in a research note.

Williams explained that ESG is about informing better decision-making by gauging the benefits of material, environmental, social, and governance issues to the investment process. The theme could enrich traditional research like analyzing financial statements, industry trends, and company growth strategies.

Research suggests that long-term risk-adjusted returns and lower downside have upended the notion that ESG investing would translate to reduced returns. Additionally, State Street Global Advisors’ own research discovered that 69% of ESG adopters point out an ESG strategy helped with managing volatility. Additionally, 75% expect the same returns from those investments as they do from others.

As a way to help financial advisors better integrate ESG principles effectively into a portfolio, Williams highlighted three key aspects. For starters, review all the angles to identify a clear entry point. The advisors should determine if and how integrating ESG investing fits into the client’s long-term plan; educate clients as part of the discovery process; clarify the motivation to inform the journey, narrow the focus and shape priorities; and target opportunities to identify resources and ESG investment strategy selection.

Secondly, keep risk in perspective. Advisors should select the degree of ESG integration; assess the broader asset allocation to keep the investment plan properly balanced; avoid introducing sector or style biases; and review personal values and risk framework with clients to help them understand ESG investing considerations.

Lastly, take the long view. Advisors should understand the client’s perspective and align expectations on non-financial outcomes and reporting; define success as part of the investment plan; modify ongoing reporting to address client’s priorities; and adapt portfolios as motivations shift.

For more news, information, and strategy, visit the ESG Channel.