Jamie P. Hopkins, Esq., CFP®, LLM, CLU, ChFC, RICP, is the managing partner of wealth solutions at Carson Group. He is a finance professor of practice at Creighton University’s Heider College of Business. Carson Coaching is the exclusive coaching partner of FPA.
Ana Trujillo Limón is the director of coaching and adviser content at Carson Group. She holds a bachelor’s degree in political science and journalism from the University of Miami and is currently pursuing a master of business administration at the University of Colorado, Denver.
The pandemic changed many things in clients’ lives. Notably, it has put an increased emphasis on them wanting to make an impact with their money.
Solutions for advisers to help their clients invest in ways that align with their values are popping up across financial services. We recently sat down with a few founders to identify some trends in environmental, social, and governance (ESG) investing and ways to figure out if values-based investing is important to your clients.
Addressing and planning for ESG investments is important for you because clients specifically in the Gen X and millennial cohorts have put an increased importance on sustainable investing and social issues. With the Russian invasion of Ukraine in February, many clients are concerned about their investments playing a role in supporting the war effort.
A Boston Private survey from 2021 found that over the prior three years, high-net-worth investors started to feel issues like climate change, sustainability, and ESG investing were more important. This was especially prevalent among millennials and Gen X respondents.1
As an adviser or a planner, you want to be able to talk about the subject with your clients and point them in the right direction—especially if they are among those cohorts that care about those issues. Also, many experts in the space note that values-based investing is just how investing will be done in the future, so getting a jump start will only be beneficial to you.
In this article, we’ll lay out some current trends in ESG, where experts think it’s going in the next decade, and some guidance for talking about the subject with your clients.
From Charitable Giving to Impact Investing
Oftentimes, the terms “ESG,” “values-based investing,” and “impact investing” are used interchangeably. Whatever name you’re using, it essentially boils down to ways clients can invest to align with the things they care about.
One of the values people currently care about is the war in Ukraine and not supporting the Russian war effort. Zachary Conway, founder and CEO of the fintech platform Seeds Investor, noted that many clients have called to ask what the war means for them and how they can make a difference.
“People react to these unfortunate moments with their money—particularly with charitable giving,” Conway said. “What’s interesting about this moment, because we’ve unlocked values-aligned investing as a thing we can do, these moments are not just driving people to put money into a nonprofit in this cause area, but [asking] ‘what is my money doing in my retirement account?’”
Corine Merriman, CFA, CPA, client relationship manager at Ethic, a platform that helps advisers and clients create portfolios that align with clients’ goals, noted that there are two areas of concern for clients right now: the portfolio exposure clients actually have, and which companies are in portfolios that are financed or directly linked to Russian oligarchs who are supporting the Russian efforts.
“It’s such an interesting point in time in ESG investing in that we’re seeing so many other public companies take action because they’re more concerned with their reputational risk and the long-term impact of what consumers and investors think of their business rather than that short-term revenue,” said Merriman, citing companies that have voluntarily withdrawn from or stopped doing business in Russia.
Gabe Rissman, founder and CEO of YourStake, provided a tool to help clients determine the exposure to Russian companies in their portfolio.
“We thought that was really important to bring transparency to investors about their exposure to this issue,” Rissman said. He noted they built the dataset because their adviser clients were asking for it. Investors want to keep abreast of any business risks and opportunities in their portfolios, and when it boils down to it, that’s what ESG is about.
“This is a fundamental risk exposure,” Conway said. It’s “a good example, but an unfortunate example, of how that tie to shareholder value and risk mitigation is tied to what’s driving an investor from a values perspective as well.”
From Reactive to Proactive: Know How Your Clients Want to Affect Change
Clients who are passionate about certain things, like reducing poverty and food insecurity, are likely already doing the work in the community. And they’re likely the ones who are ready to be more proactive in their ability to affect change through their portfolio. This is one of the benefits of ESG investing—clients being able to be proactive in this way.
Jay Lipman, co-founder of Ethic, noted that impact investing can affect true social and environmental change in the world.
“If you can control where assets flow and where investors focus their developmental energy and capital—what they perceive as a good long-term investment—you can drive capital toward the people, infrastructure, and systems that can benefit from it,” Lipman said.
One way to be proactive for your clients is to know what their values are. A few ways to do this:
Avoid the jargon. While ESG is a good anchoring term for the space, Merriman said, “saying ‘ESG’ can put somebody on their heels a little bit” and overwhelm them.
Make a values assessment part of the discovery and onboarding process. You can put together a survey that you use when clients onboard that tells you what their values are. Ask things like how they spend their time, in what ways they like to give back to the community, and what things and people are most important to them. Conway said you want to know who your clients are, what they care about, and how they think.
Bring it up organically and in nonjudgmental ways. Merriman said that you want to bring up impact investing organically.
“Asking about current events is a really easy way to pull out of a conversation what a client cares about,” Merriman said. “It can be really hard to sit down in front of somebody and ask, ‘What are your values?’ But if you ask them about current events and this specific geopolitical crisis, it can be a powerful way to learn more about what your client might be interested in emphasizing in their portfolio.”
Rissman stressed the need to not make clients feel judged. For example, instead of asking, “Do you think owning a gun is bad?” you can ask, “Do you own a gun?” This can help you figure out where they might stand on issues.
Keep yourself up to date on “greenwashing.” Greenwashing, according to Investopedia, is when companies provide misleading information to make their products and practices appear more environmentally friendly than they are.2
Merriman said clients who are more experienced with ESG investing are more likely to ask about greenwashing, and Rissman added that recent studies found both retail and institutional investors were asking more questions about greenwashing versus the financial performance of values-based investments in recent years. Conway said that’s likely because the market has spoken, and values-based investments perform just as well as, and in some cases better than, other types of investments.
As such, it’s important to know which companies might be engaging in this deceptive practice so your clients aren’t investing in anything that might not align with their values. Conway cautions to always explain how and why the portfolio is constructed a certain way, and also warns clients that it’s not going to always align perfectly.
“No company is perfect,” Conway said. Present clients with the metrics and explain what they mean in a simplified way. And in the end, he added, this type of investing is about empowering people to put their money to work in ways they feel are important.
Check in frequently. Conway added that corporate behavior is constantly changing, and clients’ values might shift. It’s critical to continually check in with clients so you’re up to speed on their changing needs.
Trends in the Next 10 Years
There are several trends the experts predict might happen in the next decade:
Values-based investing as the default. The experts all agreed that the biggest upcoming trend might be that values-based investing will be the default investment style in 10 years. As such, knowing about values-aligned investing might no longer be a nice value add for advisers—rather, it will likely be part of the core knowledge.
“In the last five years, advisers have thought of ESG as a separate asset class,” Conway said. But he predicts in the future it will be a fundamental part of every asset class. “It’s not going to be a separate, bracketed thing; it’s just going to be how we invest.”
Democratization of personalization. Merriman noted that, oftentimes, the personalization of values-based investing might be cost-prohibitive for some investors, but she foresees that more people will have access to personalization in the future.
“From a technology standpoint, near-term we’re headed to a point of not having that threshold of which you can invest in a diversified portfolio of individual stocks, thanks to fractional shares,” Merriman said. She added that she foresees these new investors might also be able to proxy vote in addition to creating personalized portfolios. “This will be a huge milestone in the adviser and investor space.”
Transparency. Rissman foresees that there will be more transparency in data because in the future, he foresees mandatory frameworks for reporting ESG data. This means it could be easier for apples-to-apples comparisons versus now, where there’s voluntary reporting and it’s not as easy to compare data.
Merriman added that increased transparency in data can help advisers examine their clients’ risk tolerance and risk mitigation and align their values-based investments accordingly.
Shareholder engagement. Rissman said he believes the modern ESG movement began with people wanting to divest from companies supporting the South African apartheid regime that lasted from 1948 until the early 1990s.3 In the next decade, Rissman predicts that there will be a return to focusing on shareholders being more engaged on not funding or supporting actions that are antithetical to their beliefs. Shareholders have power, he added, and over the next decade we might start seeing shareholders wielding power to steer companies to be more ethical and responsible.
Renewable energy as part of diversified portfolios. Merriman dreams of a time when an investor can ask for a diversified portfolio and the energy sector represented in that portfolio will be renewables. But until then, she predicts an increased shift into investing in energy companies that are shifting toward renewables or that are focused on moving toward a lower-carbon economy.
These are predictions, not guarantees, but either way, ESG or values-based investing has the potential to make a real impact.
“Values-based investing at scale will shift incentives across the economy and change the world,” Rissman said.