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ESG: It's time to have the conversation with clients

Advisers need to be willing, and prepared, to talk to their clients about what they want from their investments.

ESG: It's time to have the conversation with clients

By Veronica Strachan


ESG investing is one of the fastest growing areas of finance across the globe. What was once regarded as a niche industry is becoming a major disruptor.

The signs of the shift are everywhere. Just this year the signatories of the United Nations Principles for Responsible Investment (PRI) hit the 3,000-mark, covering a combined $103 trillion in assets under management.

In 2019 cumulative issuance of green bonds hit $1 trillion and the Business Roundtable, a non-profit organisation whose membership is made up of the chief executives of major US companies (in many respects, the epitome of capitalism) saw 200 CEOs, including Jeff Bezos of Amazon and Jamie Dimon of JP Morgan, sign a statement to support moving away from the concept of shareholder primacy to one focusing on all stakeholders.

It formally recognised that business owes a commitment to employees, customers, suppliers and communities (including the environment) as well as shareholders.

Business is increasingly incorporating ESG considerations into day-to-day practice, savers are increasingly expecting people and the planet to be considered as part of investing, and financial regulators, particularly in Europe, are finalising rules to make sure that environmental and social factors are scrutinised and disclosed.

Start a conversation

If you are a financial adviser now is the time to have some crucial conversations with clients about their ESG preferences. Without careful preparation, the questions you ask could well lead to investments that are at odds with what your clients really want (an error of commission) or cause you to ignore investments that actually would have been suitable (an error of omission).

Before you begin, it’s worth considering terminology, as this has potential to add to the confusion.

Historically, a lot of terms have been used for investing that incorporates social, environmental, or moral considerations along with pure financial considerations.

These terms include ethical, green, socially conscious, ESG, sustainable and socially responsible investing (SRI). As umbrella terms, none of these is quite broad enough to encompass all strategies, and some have unhelpful connotations (for example are you unethical if you don’t invest in an ethical fund?).

A key objective in having the discussion with clients should be to identify where they sit on the ESG spectrum, as highlighted in the diagram below.

(Click to enlarge)

How you frame the questions can have a major impact on the sort of answers you will get back. Raising the subject has the potential to open a can of worms.

Addressing topics that may not have been considered in great detail before – whether that is third world labour, single use packaging or the impact of fossil fuels on the environment – can lead to a crisis in confidence about long held beliefs. It could also create investment expectations that are difficult to achieve, that may be expensive, or that may not align to the financial expectations of individual clients.


When approaching a conversation about ESG, test that the answers you get are not skewed by emotion. For example, few people would say no if asked if they would like to invest in a portfolio that helps the planet and would achieve superior returns. But question doesn’t separate out how strong their altruistic commitment is.

It is far better to ask whether they’d still be willing to invest in a portfolio if they would have to pay a premium to do so. It may be that, happily, the trade-off can be avoided when it comes to actually selecting the investment in the real world, but if not, the adviser will have a firm basis for their recommendation.

Responsible investing is complex; its terminology is not formalised; regulations and investment providers keep evolving and questions remain whether investing sustainably affects performance and hence the likelihood of meeting financial goals.

However, with so many issues threatening the status quo of our daily lives, ignoring the subject is not recommended. For financial advice professionals, having the knowledge and confidence to engage in crucial conversations with clients on this topic is essential. To help with this, PortfolioMetrix has recently published a comprehensive whitepaper entitled ‘ESG in Investing: everything you wanted to know but were afraid to ask’.

Key elements of the whitepaper include:

  • How responsible investment portfolios have performed: a review of performance and what this could mean for future asset allocation.
  • Clear explanations for terminology and a jargon/acronym buster.
  • The characteristics of responsible investment: are companies with higher ESG ratings better run? Why caution is needed in making universal assumptions.
  • A timeline of the evolution of ESG: how we got to where we are and why.

The paper is free to download from the PortfolioMetrix website.

Veronica Strachan is with PortfolioMetrix.

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