Four reasons why you should incorporate sustainable investing into your practice
- You are swimming with the tide of growing investor interest rather than against it. Millennials and women consistently indicate they have high levels of interest in sustainable investing — defined as investments that incorporate environmental, social, and corporate governance criteria and consider their impact. These two groups of investors are commanding more and more assets. Over the next three decades, a massive intergenerational transfer of wealth will occur and that money will flow into the hands of these younger investors, a group that will be composed of just as many women as men.
2. Selecting investments for your clients’ portfolio that consider how well companies are managing environmental, social, and corporate governance (ESG) issues is a way to reduce risk. ESG issues are sometimes overlooked or not considered systematically in traditional investment analysis. I’ve found, for instance, that funds with Morningstar Sustainability Ratings of High (5 globes) tend to be lower volatility funds.
3. Adding ESG to your practice gives you the opportunity to connect with clients on a deeper level. One Saturday morning last summer, there was a knock on my front door. My wife came in with a solemn look on her face and said, “Your doctor is at the door; he wants to talk to you.” As you might imagine, all kinds of terrible thoughts rushed to my head.
We sat down on the front porch, and to my surprise and obvious relief, he pulled out a stack of papers about sustainable investing — some of which I had written. He’d been doing some research on it and had asked his advisor about it the previous day, only to have gotten a blank stare and this response: “Not something we recommend.” Here’s what my doctor said to me: “This guy just doesn’t get me.” An advisor able to help clients interested in sustainability make a difference with their money will develop a deeper bond. By helping them invest in ways that are meaningful to them, you are giving them an identity as investors, a way to relate to their investments. Such a connection could make them better investors, more likely to focus on the long run and stay the course when markets struggle.
4. Making sustainable investing a feature of your practice can be a great way to differentiate yourself. There is still a first-mover opportunity in many areas. Sustainable investing is already entrenched among institutional investors, and with nearly $9 trillion in assets in the United States and $23 trillion globally, it isn’t going away. If you have an established practice, adding an ESG capability may help you retain assets as your older clients pass money to younger generations — or when married women, who tend to outlive their husbands, take control of their investments. If you are still building a practice, having an ESG capability may help you attract new clients — those who are moving away from their parents’ or husbands’ advisors that just don’t “get” them, as well as those who are choosing advisors for the first time.
A version of this post originally appeared on Morningstar.com.