How Financial Advisors Can Incorporate ESG Investing Portfolios

Financial advisors can also help clients achieve their long-term goals by effectively incorporating environmental, social, and governance, or ESG, principles into portfolios through targeted strategies.

ESG strategies can add value to an investment portfolio, generating improved long-term risk-adjusted returns.

“Addressing material ESG issues is good business practice and essential to a company’s long-term financial performance—a matter of value, not values,” State Street Global Advisors President and CEO Cyrus Taraporevala said.

State Street Global Advisors’ own research found that 69% of ESG adopters say pursuing an ESG strategy helped with managing volatility while 75% expect the same returns from those investments as they do from others.

However, it is not always clear cut how financial advisors should incorporate ESG investments into a portfolio.

“Effective integration of ESG principles into a portfolio begins with a client-focused process, not a product-focused process. Using a client-centric approach requires advisors to identify suitable ESG strategies, offer beneficial education, and track clients’ progress toward longer-term objectives,” Brie P. Williams, Head of Practice Management, State Street Global Advisors, said in a note.

Specifically, Williams highlighted three steps to help advisors focus client conversations on key considerations, including review all the angles to identify a clear entry point, keep risk in perspective, and take the long view.

First off, advisors should determine if and how integrating ESG investing fits into the client’s long-term plan. They should then educate clients as part of the discovery process, and clarify the motivation to inform the journey, narrow the focus, and shape priorities. Additionally, one may target opportunities to identify resources and ESG investment strategy selection.

When looking at risk considerations, advisors should select the degree of ESG integration, assess the broader asset allocation to keep the investment plan properly balanced and review personal values and risk framework with clients to help them understand ESG investing considerations.

Lastly, in constructing a long-term portfolio, advisors should understand the client’s perspective and align expectations on non-financial outcomes and reporting, define success as part of the investment plan, and modify ongoing reporting to address the client’s priorities.

“ESG enables clients to invest with greater precision—to apply a broader lens to more deeply analyze investments,” Williams added. “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.”