ESG Investing: A Match for Post-Pandemic Outlook

– First Published on Nasdaq –

Interest in ESG investing has risen significantly in recent years. So, what is it?

ESG represents Environmental, Social and (Corporate) Governance factors as a measure of sustainability and social impact of an investment. It’s intended as another “lens” investors and advisors may want to use, alongside, not usurping, financial factors.

For years, ESG issues were a secondary concern for investors. It was often seen as “alternative” or nice to have but not mainstream. Sometimes not even taken seriously. Increasingly, clients are initiating ESG conversations.

One of the reasons may be that ESG investing has been shown to potentially present the greatest opportunity for portfolios. No longer an esoteric offering, financial advisors could well fall behind and lose clients if they fail to identify what issues are important to clients and help them build their portfolio in a way that reflects their values.

Add to that the fact that people have been very reflective during the pandemic; thus, many are beginning to see how various aspects of their lives – including their investments – line up with their values. ESG investments may be one of the answers for which they are searching.

Leverage conversation, technology

Many advisors are accustomed to having conventional conversations with their clients, without knowing those clients at a deeper level. Don’t be tentative or judgmental: Have the conversations to establish if and where clients fit in terms of ESG investing. Some will have base knowledge of the topic; others will appreciate a succinct ESG tutorial.

Advisors may not even realize that some of their clients are already researching companies’ records on environmental sustainability, social responsibility and governance (think transparency and accountability). Other clients may not know ESG investing is not just a nice-to-have approach, but can be a genuine, productive metric of investment potential and returns.

How can technology and data facilitate these conversations? Tech and data provide advisors and analysts with information about companies worthy of investment. It delivers data to advisors based on verified performance, demonstrating that companies worthy of investment are genuinely ESG compliant and are not just one of the in-name-only players.

Better still, tech and data can help advisors and even investors themselves understand the decision-making behaviors of investors. Especially as we come out of pandemic lockdown, in which everyone is increasingly comfortable with remote interactions, advisors need to have behavioral insights at their fingertips. As we all work “leaner,” insights provide an edge for advisors and firms committed to rethink and reshape how they deliver wealth management advice in our rapidly changing world.

Broaching ESG option

The real challenge for many financial advisors is that they aren’t sure how to have ESG conversations with clients. Many might feel asking about a person’s commitment, or not, to environmental and social issues is fraught with landmines. And, if advisors have not done their homework, they could be left flat footed as they genuinely do not know which companies are worthy of ESG investing.

So, how can advisors avoid the potential pitfalls of discussing ESG with clients? Like so many life conversations, such a discussion flows best when each contributor to the exchange understands their inherent behavior. (Again, with tech and data informing both the advisor and client perspectives and their “take” on each other.)

Communication style

An advisor whose style is to converse with authority and who has a strong drive to reach goals and deliver results, may suggest investment opportunities in industries compliant with ESG, where returns are likely to be significant…but they also may fail to “hear” their client.

A colleague recently shared the story of an interaction he had with a former advisor: When the colleague-client noted to his advisor that he did not want to invest in certain types of companies (decidedly not ESG ones and which differed from his core values), the advisor responded, “Well, I guess you are not interested in returns.”

Not only is that untrue of most ESG investments, that kind of response shuts down communication, damages the relationship and likely negatively affects success for both advisor and client. Having tech- and data-driven behavioral insights in hand could have changed the trajectory of things for both client and advisor.

On the flip, a client who is reflective and needs time to research and consider options and who would prefer to invest in a low-return investment but with a business who has a greater commitment to ESG, could feel pressured and withdraw from the conversation. So, again, understanding a client’s innate approach and reactions to stress and money decisions, as well as how they best communicate and are communicated to, could have brought alignment, understanding and, most importantly, productive communication to this scenario.

The time for ESG is now

With “behaviorally smart” tech and data integrated into their other systems, an advisor can, at the touch of a button, have real time information in front of them to understand client behavior, bias, and decision-making and communication style. This enables a higher level of advisor-client compatibility – and that’s the road to success.

Likewise, behavioral data gathering tools deliver practical insights so advisors can understand which clients they have significant behavioral differences with. It also would offer insights into how best to manage the differences. Ex: How and when do I communicate with this client to maximize outcomes for all parties involved?

In all communication exchanges, adapting behavior to relate to another person requires concentrating more on a level of self-awareness. There is no doubt ESG investing is delivering a huge shift in emphasis to financial markets and curious investors.

In a more reflective, post-pandemic world, more investors are looking to be part of global environmental and social solutions, working when they can with organizations that get things right on governance. These investors expect their advisors to be on top of their game in terms of understanding what they the client are trying to achieve. Knowing how to have the corresponding dialogue with them on ESG issues creates a win-win.

Financial services businesses that invest in tech stack solutions that provide tools to support ESG investing will be significantly more successful than their competitors. Not only will they be known for the proactive, positive impact they are having on society, they will undoubtedly enhance their organization’s long-term financial value and build client wealth in line with client wishes and, by nature, the greater good.

Leon Morales

Leon Morales

Chief Relationship Accelerator

Human Behavior Advisor, Human Capital Management, Customer Experience Specialist

Leon Morales is a builder of successful people driven organizations. With a deep conviction that organizational success is only achieved when leadership really understands each employee, Leon is certified in the DNA Behavior. Method and Birkman Method of personality assessment and has crafted his professional career around high-impact consultative roles. These include serving as Business Development Principal and Leadership Practice Principal for Innovar Collective, LLC and in various corporate leadership roles during his 17-year tenure with Cox Communications.