IInterest in ESG investing has increased significantly in recent years. So what is it
The ESG represents environmental, social and (corporate) governance factors as a measure of the sustainability and social impact of an investment. It is meant to be another “lens” that investors and advisors want to leverage alongside financial factors that are not usurping.
ESG issues have been a secondary concern of investors for years. It was often seen as “alternative” or beautiful, but not mainstream. Sometimes not even taken seriously. Customers are increasingly initiating ESG discussions.
One of the reasons could be that it has been shown that investing in ESG is potentially the greatest opportunity for portfolios. No longer an esoteric proposition, financial advisors could fall behind and lose clients if they fail to recognize what issues are important to clients and help them build their portfolio to reflect their values.
On top of that, people were very thoughtful during the pandemic. As a result, many are beginning to see how various aspects of their lives – including their investments – align with their values. ESG investing can be one of the answers you’re looking for.
Use conversation, technology
Many consultants are used to having conventional discussions with their customers without knowing these customers on a deeper level. Don’t be preliminary or judgmental: hold the interviews to see if and where clients fit in on ESG investing. Some have a basic understanding of the subject; others will appreciate a short ESG tutorial.
Consultants may not even realize that some of their clients are already researching company records on environmental sustainability, social responsibility, and governance (think transparency and accountability). Other clients may not realize that investing in ESG is not only a good approach, it can also be a real, productive measure of investment potential and returns.
How can technology and data facilitate these conversations? Technology and data provide advisors and analysts with information about companies that are worth investing in. It delivers data to consultants based on verified performance and shows that companies worth investing are truly ESG compliant and not just name-only actors.
Even better, technology and data can help advisors, and even investors, understand how investors make decisions for themselves. Especially when we get out of a pandemic lockdown where everyone is becoming increasingly familiar with remote interactions, counselors need behavioral insights on hand. As we are all “leaner,” insights will benefit advisors and companies determined to rethink and redesign their wealth management advice in our fast-changing world.
Address the ESG option
The real challenge for many financial advisors is unsure of how to conduct ESG conversations with clients. Many may feel that a person’s commitment to environmental and social issues is tied to landmines or not. And if consultants haven’t done their homework, they might be left flat because they really don’t know which companies are worth investing in by the ESG.
How can consultants avoid the potential dangers of discussing ESG with clients? Like so many conversations in life, such a discussion flows best when everyone contributing to the exchange understands their inherent behavior. (Again with technology and data that informs both the advisor and customer perspective and their mutual attitudes.)
A consultant whose style is to converse with authority and who has a strong drive to achieve goals and get results may suggest investment opportunities in industries that match the ESG and where returns are likely to be substantial for the client .
A colleague recently shared the story of an interaction with a former consultant: When the colleague client discovered to their consultant that they did not want to invest in certain types of companies (they did not choose ESG companies that were different from their core values). The advisor replied, “Well I guess you are not interested in returns.”
Not only is this untrue with most ESG investments, this type of response disrupts communication, damages the relationship, and is likely to have a negative impact on the success of the advisor and client. The existence of technology- and data-driven behavioral knowledge could have changed the development for both the customer and the consultant.
On the flip might be a client who is thoughtful and needs time to look for and review options and who would prefer to invest in a low-return investment but has a company with a greater exposure to ESG feel pressured and withdraw from the conversation. Understanding a customer’s innate approach and responses to stress and money decisions, as well as the way they are best communicated and communicated, could have provided alignment, understanding, and most importantly, productive communication to this scenario.
The time for ESG is now
With “behaviorally smart” technology and datum built into their other systems, a consultant can have real-time information at the touch of a button to understand the client’s behavior, bias, decision-making and communication style. This allows for a higher level of advisor-client compatibility – and that’s the way to go.
Also, tools for collecting behavioral data provide practical insights so that consultants can understand which customers they have significant behavioral differences with. It would also provide insight into how best to deal with the differences. Example: How and when do I communicate with this customer to maximize results for everyone involved?
In any communication exchange, adapting behavior to another person requires a greater focus on the level of self-awareness. There is no doubt that ESG investing is causing a huge shift in focus to financial markets and curious investors.
In a more reflective post-pandemic world, more and more investors are trying to be part of global environmental and social solutions, and working, when they can, with organizations that are doing things right when it comes to governance. These investors expect their advisors to be ahead of the game in understanding what the client is trying to achieve. Knowing how to have the appropriate dialogue with them on ESG issues creates a win-win situation.
Financial services companies that invest in tech stack solutions that provide tools to support ESG investments will be far more successful than their competitors. Not only will they be known for their proactive, positive impact on society, but they will undoubtedly add to the long-term financial value of their business and build customer assets in accordance with customer needs and inherently the common good.
After the pandemic, has your consulting practice been prepared for informed customers, new ways of working and productive discussions about ESG investments?
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.