Why Financial Advisors Should Embrace Sustainable Investing

By now, you’ve probably seen breathless reports that sustainable investing (more specifically, ESG – Environmental, Social, Governance focused investing) is the next big thing, and depending on who you ask you may even be seeing results that imply ESG performance is on-par with “traditional” portfolios.

Sidebar: I do not have a horse in this race, and the data definitely seem mixed depending on who ran the study, but that particular issue is actually irrelevant to this article so let’s keep going.

Sustainable investing bridges that gap

One of our core specialties lies in helping normal human people get excited about financial products and services: stuff like muni bonds, quantitative allocation tools, and private equity. For most people—even, often, professionals—these things aren’t particularly thrilling.

But ESG is different: you can pretty easily make it exciting.

This is the one area of finance where you can look at a normal person and say, “Your investment dollars are going to companies that can help make the world a better place.”
I mean…wow. You can be part of making the world a little bit better, and all you have to do is sign here and allocate to these ETFs.

Isn’t that amazing?

Sidebar: obviously, in reality, it’s a little more complicated than that and we all know it. I think it behooves every advisor or asset manager to know the vagaries of the particular ESG strategy they’re recommending. Some are all about “green economy” companies, others are more about finding the least bad mining company, and so on.

But still! It’s really exciting! And the more so for younger investors.

The Great Generational Wealth Transfer

Now, obviously no one wants to talk about wealth transfer these days, and rightly so because we all spent 2020 (…and now 2021?) scared and stressed out. But this is a longer-range reality, and since I’ve been banging on this drum for years, I don’t feel bad bringing it up here among friends.

One of the major concerns I have for every advisory firm I work with is the shifting tide of wealth transfer.

You’ve seen the statistics: we’re heading into the largest generational transfer of wealth in history. And the vast majority of people who inherit money (whether it be from a spouse or a parent) leave the original advisor and find a new one.

If you are an advisor and you are not worried about this, I am sorry to say you are making a huge mistake. This is a real thing that is happening and will happen, and unless you’re planning to retire and close up shop in the next few years, I guarantee you right now it will affect your business.

What does this have to do with ESG?

Advisory firms should be extra worried about their clients’ kids. They are far less likely to be loyal to your firm than a surviving spouse. These are people with Robin Hood accounts, a broad view of society, and a natural distrust of the financial industry. Graduating from college into a legendary recession will do that to you.

ESG can cross that divide.

Let’s review what we know about younger investors. Note that I’m lumping several generations together here, which is not strictly accurate for every sub-demographic group, but bear with me: this is a blog post, not a doctoral thesis.

If I can sum up younger investors as a group, I’d make the follow inferences:

  • Not especially trusting as consumers (especially when it comes to the financial industry)
  • Care about voting with dollars
  • Want to make smart decisions, often fueled by online research and blogs
  • Feel intimidated by the financial system and its confusing array of products
  • Often inclined towards pro-social products and concepts

These are obviously broad generalizations, but do you see how beautifully they align with the concepts of ESG?

We’re not talking about a better performance quarter-over-quarter; we’re talking about aligning dollars with values and contributing (potentially) to a better world overall.

This can be part of a shared language with younger investors

Performance isn’t king for a lot of people, this aging Millennial included.

ESG can bridge that gap and provide a robust starting point for those who are not inclined toward investment optimization or investment advisors. It shows just how powerful a force of good investing can be – and that is really cool for a lot of people.

From there, you can build into the shared language of goals, personal missions, and fears. You can open the door to bringing your clients’ children into the fold by soliciting their input on philanthropic funds. Or simply get them talking about what they care about.

Is it a silver bullet that’s going to guarantee your firm’s continued success forever? No, nothing is. But it is a powerful approach to investing that can resonate far more with your clients’ heirs than talk of performance or long-term allocation.

Need some help reaching younger investors?

That’s what we’re here for. To learn more, please contact us or schedule a call.

September 25, 2021

Take a Closer Look