Adviser highlights challenges of discussing ESG investing with clients

ActInvest financial adviser Sarah Wood said that some advisers could still be struggling to demonstrate the positive impacts and financial benefits of environmental, social, and governance (ESG) investing.

“Some of those underlying concerns that I think clients still have about ESG investing include financial security, risks, and lack of clarity over what it means to be invested in an ethical portfolio,” she told ifa.

Ms Wood recalled her experience as an adviser early in her career around a decade ago, when clients reacted with reluctance and “outright hostility” when she initiated conversations around ethical investing.

While clients are now more receptive to discussing ethical investing, many advisers could still be navigating difficult conversations but may not vocalise this, Ms Wood suggested.

“When I initiated ethical investment conversations early on in my career, my clients would respond that they either didn’t believe in it, thought it was pointless, or that they would lose money,” she recalled.

“Things have changed, and it’s more openly discussed now but I do think that clients still hold some concerns around ethical investing, particularly around the risks and financial security.”

This view was reflected in Netwealth’s Investing for good white paper, which said that “the real challenge for advisers (and the industry as a whole) is to clearly demonstrate and quantify the positive impact and the financial benefits” of responsible investing.

The report also said that more than seven in 10 investors rate their understanding of responsible investing as average or non-existent, pointing to a clear opportunity for financial advisers to step into that “knowledge vacuum” and educate clients to address misconceptions and misapprehensions.

To address clients’ concerns and avoid imposing her own views on them, Ms Wood said she engages in “win-win” conversations by asking them about their goals and objectives.

“Instead of starting out by asking whether they want to engage in ethical investing, I might ask them what types of economic activities they would be willing to invest their money in and what they would prefer to avoid,” she said.

“For example, if a client is specifically concerned about financial returns, I talk about having win-win conversations. I show them that an investment portfolio has had returns that are similar or better returns than one that has not engaged in ethical investing.

“I then tell them that on top of that, this portfolio has extra filters or additional scrutiny applied to it that removes companies that might be controversial. I then ask if that’s something the client would be interested in.

“Clients might then respond positively and are happy to have that extra consideration in their portfolio because their underlying concerns have been addressed.”

For other advisers struggling with client conversations around ethical investing, the key is to not fear initiating these conversations, Ms Wood said.

“It’s okay to listen to the clients’ concerns and understand where they’re coming from,” she said.

Ms Wood suggested that advisers begin by educating clients around the different types of portfolios that are available in ethical investing.

“If you do this, clients are much more likely to appreciate where you’re coming from and that you’re trying to cover something that they may not have considered or understood or were too fearful to bring up in the conversation,” she concluded.