Advisors: Be proactive with clients about sustainable investing

If you’re a financial advisor, it’s more important than ever to get up to speed on sustainable investing. Why? Because it will help you better serve your clients, both current and prospective, whom I guarantee you want to know more about how they can invest for sustainability, purpose, and impact.

Survey after survey tells us that large majorities are interested in investing this way, but many don’t really know how to go about it. I’d guess that a lot of investors aren’t even sure how to bring it up with their advisor.

And so, it’s up to you, as their advisor, to be proactive — to let them know that they can indeed invest this way, that it’s perfectly fine for them to do so, and that you can implement this concept in their portfolios.

In so doing you will connect your clients with their investments in a deeper, more meaningful way. You will help them become a part of a growing number of investors worldwide who are voting with their investment capital to encourage companies to operate in more sustainable and responsible ways and to hasten the transition to a low-carbon economy.

At the same time, you can make them better at investing — nudging otherwise reluctant investors into regular contributions, helping them develop a long-term perspective and helping them commit to staying the course during market turmoil because they have a stronger, more purpose-driven connection with their investments — and with you as their advisor.

And in the process, you as a financial advisor can also become part of this activity of sustainable investing that at its essence is purpose-driven — to help make capitalism work better for more people and the planet while providing competitive investment returns over the long run for your clients.

Yes, you’re in this business to make a living, but we all know there’s more to work than a paycheck, and just as you make investing more meaningful for your clients; you can make your own work — your practice — more meaningful to you.

So let’s delve into this in a bit more detail:

People care about sustainability issues. A lot of people care personally about sustainability issues. The Allianz Life ESG Investor Sentiment Study, released in April, asked 1,000 Americans over age 18 how much they care about various ESG issues:

The survey reported overwhelming majorities who said they “personally care” about issues ranging from “reducing impact of climate change” (79%) to “corporate accountability” (87%) to “safe, human working conditions” (93%).

People are increasingly likely to act on their beliefs when they make decisions as consumers and workers. In the same Allianz Life study— see the right side of the chart above — a total of 83% said that Environmental, Social, and corporate Governance concerns are important when deciding “whether to do business with a company.”

In another broad-based survey of Americans by JUST Capital, 74% said they had “begun purchasing or purchased more of” a company’s products or services to show their support for a company’s positive behavior.

And in the same survey, respondents were asked about how much they would value working for a “just” company — defined as one that is “ethical, honest and fair, and behaves this way when it comes to its employees, customers, shareholders and the environment, as well as the communities it impacts locally and around the world.”

Given the choice between taking a position with a more “just” company or a less “just” company that pays more; 76% chose the more just company.

A subset of the respondents was asked to choose between a more “just” company and a less “just” company that pays 20% more — 71% chose the more “just” company.

When asked specifically about sustainable investing, people indicate overwhelming interest towards the idea of it. The decision-sciences team at Morningstar has developed a tool that helps investors and their advisors understand how much they value sustainability in an investment context. Using the tool, an investor is asked to theoretically allocate money to a series of paired stocks based on their return characteristics and the sustainability profile of the company. A sustainability-preference score is then calculated based on their answers.

The findings from a sample of 950 respondents nationally: 72% incorporated sustainability into their investment decisions (see the three columns on the right in the chart below). And while Millennials and women were more sustainability-minded than older generations and men, the differences were generally not that significant.

In a 2018 Nuveen survey — 80% agreed with the statement that “My investments should try to make a positive impact on society” up from 75% in 2015; and 81% agreed that “I want my investments to make a positive impact on environmental sustainability” up from 73% in 2015.

And in that Allianz Life study — nearly 80% said they “love the idea of investing in companies that care about the same issues” they do.

So a lot of people are interested, even predisposed to be sustainable investors.

But, they just don’t know much about it, and may not even know how to bring it up with their advisor. A lot of folks have made the connection between their beliefs and actions when it comes to consumer or even employment decisions, but when it comes to investing, many still haven’t made that connection.

Perhaps because they don’t realize they can.

In a recent white paper on what it called “social investing,” Newton Investment Management, part of BNY-Mellon, asked U.S. investors “how familiar are you with the concept of social investing?”

More than half (55%) said they were not at all familiar. But among them, 19% nonetheless said they were “extremely” or “highly interested” in the concept. Another 35% that said they were “moderately interested” and 31% were “slightly interested”.

That’s 84% of those who didn’t really know what social investing was when they were asked who nonetheless indicated some level of interest.

What about the 45% who said they were familiar with social investing? Thirty-five percent were “extremely interested”, 30% were “highly interested”, and 18% were “moderately interested”. Only 4% of those familiar with the concept said they were not at all interested.

Just because an investor knows sustainable investing exists is no assurance that they will bring it up to their advisor. But chances are, somewhere around half of your clients know what it is and nearly all of them have interest. And while the other half may not really know what it is, chances are most of them also would have some interest if you explained the concept to them.

Bottom line: If you are waiting for clients to bring up sustainable investing, you may be vastly underestimating their interest.

Be proactive not reactive. At least some advisors appear to be getting more proactive. In the Nuveen survey, 51% of advisors said they now discuss sustainable investing as a potential investment approach, up from 41% in 2017, 30% said they now have it in their intake forms, up from 19% in 2017, and though 40% said they still wait for clients to bring it up, that’s down from 48% in 2017.

Being proactive: Connect, Define, Invest. A proactive conversation with your client about sustainable investing has three elements to it: establishing a client’s interest in sustainability issues and connecting it to investing, defining what you mean by sustainable investing, and being able to show the client what their sustainable portfolio could look like.

Connect: First, make the connection between who your client is and sustainability issues. You can do this through client profiling, but you may also need to move beyond it. We know Millennials and women have higher levels of interest, but as the Morningstar sustainability preference tool results suggest, you may not want to write off older generations and men. A client’s profession could provide some clues, but don’t ignore those who work for big corporations, because employee engagement around sustainability issues at work may have sparked their interest.

Armed with the knowledge of investor surveys like those cited above, perhaps it’s better to simply ask them about their attitudes towards investing in big corporations: “You’re going to be investing in public markets; how do you feel about investing in the world’s largest companies?”

Or ask them whether they ever vote with their consumer dollars to reward or penalize a company’s behavior or public stances?

Or just ask them straight out: “Do you care what kind of companies you invest in? Because more investors these days do think it’s important and it’s now possible to consider sustainability issues in your investments.”

Chances are questions like these will draw out the many who are interested without somehow offending those who are not.

Define Sustainable Investing: The second facet of being proactive is being able to define sustainable investing. It’s important not to return to an reactive stance at this stage. You don’t want to say, “Well, you’re the client, I can make it whatever you want it to be. I’m just here to align your values and your portfolio.” No. Most clients want and need more guidance than that. What most clients are really asking you is to make sustainable investing tangible for them.

So do your homework, come up with a way to define and describe sustainable investing that makes sense to you and that you are comfortable with. Be authentic about it. Be able to tell the story succinctly. I recommend a practiced elevator speech on what sustainable investing is and perhaps a short presentation that you can talk through for clients who want more detail.

Have a standard sustainable investment approach: For most clients, a sustainable portfolio doesn’t have to be about customization. Beware of taking clients too literally when they emphasize one or two particular issues. If a client says she is concerned about gender diversity issues, for example, that doesn’t necessarily mean she is asking you to construct a gender-lens portfolio to the exclusion of other kinds of ESG considerations. It means that she would like to invest in a way that takes gender diversity issues into account.

For you, that’s a signal to explain how ESG- and impact-focused funds address gender diversity issues as part of their security selection, portfolio construction, shareholder engagement, and overall impact assessments. Most investors who say they’re interested in gender diversity are also interested in the full array of ESG issues and will appreciate you broadening their perspective and portfolio to address them.

Bottom line: It only makes sense to assume that your clients care about sustainability issues and that they are increasingly likely to act on those beliefs when they make decisions as consumers and perhaps even as workers. As they become more familiar with sustainable investing, chances are they’ll be increasingly likely to act on their beliefs in the investment context, as well.

As a financial advisor, you should be the one to tell them about sustainable investing because if you don’t do it, someone else will. Given the widespread interest in sustainability, there is no reason to wait for your clients to bring it up. Be proactive by helping them make the connection between their belief in sustainability and their ability to invest that way. Help them define what sustainable investing is and show them you have a sustainable investment plan for them at the ready. You’ll make them better investors and more-committed clients in the process.