En♊vironmental, social, and governance (ESG) criteria are now a permanent part of investing. ESG factors can help investors achieve both their financial and values-based nonfinancial goals, such as supporting social causes, mitigating climate change, and promoting ethical business practices.

All the major fund managers have mutual and exchange-traded funds (ETFs) that pool the assets of companies that meet ESG criteria. While there's less demand for adherence to ESG standards in the U.S., that's not the case with the EU and other parts of the world. Thus, it's no longer a niche market or passing fad. In addition, clients are demanding more and better ESG information and services from their financial advisors.

Still, Mitchell Kraus, a certified financial planner and principal at Capital Intelligence Associates in Santa Monica, California, told us that "every investor is different when it comes to ESG and values investing." Like other advisors we spoke to for this article, he asks about each client's values when they start working together—not just their financial goals. "We have clients who range from not caring at all to making sure each investment they own has been screened against their value criteria. ...ESG is not as popular for those seeking the latest investment trend and searching for the best way to find additional returns, but it's alive for those who are trying to live up to their own values in everything they do. This is especially true in younger generations."

So, how can financial advisors approach the topic of ESG investing with their clients? How can they explain ESG investing, assess whether it suits their clients, ✤address common misconceptions, and create personalized ESG investmꩵent strategies? Below, we provide tips and insights on all of this.

Defining ESG Investing For Your Clients

The first step is to define what ESG investing means and why it matters. You can use the following points to introduce ESG investing to your clients.

What Is ESG Investing?

ESG investing is a strategy that considers environmental, social, and corporate governance factors and financial matters when making investment decisions. It aims to reward companies that positively impact society and the environment while avoiding those that have negative impacts or pose risks.

Here's what each part of the acronym means:

• Environmental factors include how a company manages its natural resources, reduces greenhouse gas emissions, adapts to climate change, minimizes waste and pollution, and promotes renewable energy and clean technologies.
• Social factors include how a company treats its employees, customers, suppliers, and communities. These can involve diversity and inclusion, human rights, labor standards, health and safety, customer satisfaction, and social responsibility.
• Governance factors include how a company is run by its board and management. This includes executive compensation, board diversity and independence, shareholder rights, business ethics, transparency, and accountability.
  

David Tenerelli, a certified financial planner at Strategic Financial Planning in Plano, Texas, said it's important to keep in mind what ESG is and what it isn't. "ESG is not really a style of investing, nor is it a method of direct impact. Instead, ESG refers to data that can inform investment decisions based on outcomes related to companies' environmental, social, and governance practices." In sum, you're investing with the hope that your capital is going toward companies whose results (the data used to analyze if they meet the criteria) match their actual practices.

ESG investing can benefit both investors and society. Clients can align their money with their values, support positive change in the world, diversify their portfolio, reduce risk (including systemic risk if enough investors choose this path), and improve returns. For society, ESG investing c🍒an encourage companies to adopt more sustainable and responsible practices, which can improve their long-term performance and contribute to solving global challenges.

Most clients will need you to analyze the ESG data on these factors for them. "Typically, the primary headwind for such an approach is that investors don’t know how to begin, so introducing ESG data as a helpful tool can be a great starting point," Tenerelli said.

Is ESG Investing Right for Everyone?

The next step is to assess whether ESG investing is right for particular clients. ESG investing is not a one-size-fits-all approach and might not be appropriate for everybody. It depends on a client's investment goals, personal values, and priorities. Some clients may care more about certain ESG issues than others, or have different views on what forms positive or negative impacts.

Kraus said that's certainly the case in his community. "Here in Southern California, most of our ESG clients' biggest concern is the environment and climate change. We will build fossil fuel-free portfolios for" those clients that ask.

Tenerelli added that interest in ESG could come from all over the political spectrum: "Progressives who are seeking to advance social justice and environmental protection, among other issues; conservatives seeking the literal conservation of land, water, and air, and prudent use of precious resources, and preservation of community well-being." Kraus agreed. "We have religious clients who do not want to invest in alcohol or others who want to avoid companies that give the most to planned parenthood. Many of our clients want to avoid gun manufacturers or private prison companies. On the flip side, we have clients who want to invest in companies that pay living wages and actively recruit a diverse workforce."

ESG investing requires thorough research and due diligence, and not all ESG investments are created equal. There are different ways to measure and co♛mpare 🏅ESG metrics and performance across companies and industries. Many financial news and research firms today score and rank companies based on their ESG performance, but each might have a different approach to scoring.

Of course, as in every area of finance, there are less scrupulous companies looking to cash in on a trend. "Greenwashing is out there. Many ESG funds will claim to do the right thing but use an ESG label as a marketing ploy," Kraus said. He offered a tip for advisors examining whether a fund is serious about its ESG bona fides. "The easiest way I can find to determine if a fund really is ESG is to ask about how they vote their proxies," he said. Proxy voting involves shareholders voting on corporate issues, such as board elections, mergers, and environmental or social proposals. "Funds that vote the same as their non-ESG funds by the same company are probably not doing everything an investor wants."

Below are many of🤪 the benefits𒁃 and concerns you should discuss with clients.

Common Client M💖isconceptions About ESG Investing

Once you've evaluated your clients' suitability for ESG investing and discussed its potential pros and cons, you may want to address some common client misconceptions about ESG investing. You can use the following points to clarify some myths and facts about ESG investing:

Myth # 🃏1: ESG Investing Is Only for Younger 🐭Clients or Environmental Activists.

Fact: ESG investing is for everyone who cares about the impact of their money on the worlꦕd. While younger generations like millennials may be more interested in or aware of ESG issues than other demographics, they are not the only ones who📖 value ESG investing.

Myth # 2: ESG Investing Is Only For Wealthy🥃 or Institutiona🌳l Investors.

Fact: ESG investing is affordable for all types of investors. Thanks to the growing availability and variety of ESG ETFs, mutual funds, and theme robo-advisors, investors today can choose from a wide range of options that suit their budgets and preferences.

Myth # 3: ESG Investing Is Only for Certain ✤Sectors or Industries.

Fact: While some sectors or industries may have more exposure or influence on specific ESG issues than others, no sector or industry is immune to ESG risks or pro💧spects. For example, even though the energy sector is often associated with high environmental impact, it has the potential to contribute to the transition to a low-carbon economy by investing in the development of renewable energy and clean technolog🌠ies.

🌺How To Create a Personalized ESG Inves🙈tment Strategy

Building a client's ESG-based portfolio involves several steps:

1. Define their ESG preferences and priorities: The first step is identifying what ESG issues matter most to clients and why. You can use various sources and tools to assess their ESG preferences and priorities. 
2. Assess their risk tolerance and return expectations: The second step is to assess how much risk they are willing to take on and what kind of returns they are looking for with ESG investments. You should also consider their time horizon, liquidity needs, and tax implications. Most major platforms for risk analysis and portfolio planning include ESG guidance.
3. Help choose their ESG approach and products: The third step is determining which ESG factors matter for their portfolio and what kind of products they want to invest in. You can use tools like the 澳洲幸运5开奖号码历史查询:Morningstar Sustainability Rating to assess the ESG performance of different funds. Here are some of the common ways of doing that:
4. Negative screening: Excludes companies or sectors that do not meet specific ESG criteria or standards, such as tobacco, weapons, or fossil fuels.
5. Positive screening: Select companies or sectors scoring high on ESG criteria or standards.
6. 澳洲幸运5开奖号码历史查询:Impact investing: Investing in companies or projects that are known to generate positive social or environmental impacts alongside financial returns, such as clean water, affordable housing, or microfinance.
7. Active shareholding: Many funds and investment firms are engaging with companies directly on ESG issues through voting, dialogue, or shareholder resolutions to change their practices.
8. Monitor and review: The fourth step is to scrutinize and review their ESG portfolio regularly and adjust as needed to reflect any changes in their preferences, goals, risk tolerance, or market conditions—or news about companies, sectors, or funds that are shown not to be aligned with their claims for ESG values.

Questions To Ask Clients

To help clients determine if ESG investing aligns wiౠth their goals, ask the following questions:

• What are your investment objectives and risk tolerance?
• What are your personal values and beliefs that influence your investment preferences?
• Which ESG issues are most important to you? Which of the E, S, and G do you prioritize most?
• Are you willing to accept potential short-term underperformance for long-term ESG benefits?
• Do you prefer a negative screening approach or investing in specific companies with strong ESG performance?

The History and Future of ESG Investing

The concept of ESG investing has existed for centuries, dating back to religious codes banning investments in the labor of enslaved persons in the 1800s. In the 1960s and 1970s, investors advocated divesting from defense companies to protest the Vietnam War and from South Africa to oppose that country's system of apartheid. These are only some examples of when investors used social criteria to exert pressure on companies and governments to change their policies and practices.

The acronym ESG was coined in 2005, following a United Nations report, "Who Cares Wins." The report argued that incorporating ESG factors into financial analysis and decisions would lead to more sustainable markets and better outcomes for societies. The UN also launched the 澳洲幸运5开奖号码历史查询:UN Principles for Respons🃏ible Investment, a voluntary framework for investors using ESG factors in their investment decisions.

A Sustainable Path Ahead for ESG

Since then, ESG investing has grown tremendously, both in investor interest and assets under management (AUM). Price Waterhouse Cooper, the research and consulting giant, predicts that AUM for ESG will reach $34 trillion by 2026, while Bloomberg says it will reach $40 trillion by 2030, a 25% increase over 2022. Several factors are likely to contribute to ESG's sustained growth:

• Heightened awareness of climate change and other environmental issues
• Increased demand for transparency and corporate accountability
• The growing influence of younger generations who prioritize sustainable practices
• The effects of climate change and other ESG-related issues

Technological advances and improved access to ESG-related data will further improve investors' ability to assess companies' ESG performance accurately. Consequently, we may see the development of more sophisticated ESG investments and strategies and a more universal integration of ESG factors into mainstream investment decisions.

No doubt, too, we might see sudden shifts akin to funds breaking away from tobacco firms in the 1990s, given the disastrous predictions for climate change, in particular, among ESG issues. Tenerelli is sanguine about the growth in ESG investing, but he's not as hopeful for what it can achieve. The current economic state is "inherently unsustainable," he said. For that reason, the economy "is already starting to transition to something else. Whether that transition will be intentional and just or chaotic and unjust remains to be seen."

Tenerelli is also skeptical that even a wholesale shift to ESG would prove enough to mitigate the calamities arising from climate change and other social and governance issues. "I’m not certain whether ESG will become a stepping stone to the truly transformative changes that our economy needs to undergo to secure a livable future for all or if it will prove to be a distraction from those necessary changes," he said.

While solving these issues is among the most complex one can imagine, increasing the corporate uptake of ESG standards, he suggested. "If more investors and companies decide they want to participate in that transition in a just way, then ESG and similar movements will continue to grow."

The Bottom Line

ESG offers criteria that many investors use to shape their portfolios. Even though clients might be deeply informed about particular issues related to ESG, they are typically overwhelmed when trying to navigate which funds or companies best match their values. For example, they might be able to reference recent UN climate reports or the treatment of workers in a specific division of a major international firm. Yet, they don't know where to begin navigating the various online ESG scores and claims. Thus, financial advisors need to support even the most knowledgeable clients who want to earn returns while not funding companies and industries they find destructive.

Despite its popularity, ESG investing isn't for everyone and has challenges, including greenwashing and a lack of universal reporting standards. As such, financial advisors must keep up to date about the latest trends and developments in ESG investing to guide their clients in this rapidly evolving area.