Environmental, social and governance (ESG) and social responsible investing (SRI) are actually two distinct concepts, but there are plenty of intersections between the two. For the purposes of this article, the terms will be used interchangeably.
With that housekeeping out of the away, advisors know ESG is taking its lumps. Not only was the performance of this investing style forgettable in 2022, but arguably worse yet, ESG is now a divisive political issue. Performance shifts and it’s not a stretch to blame some of ESG’s 2022 failings on rising interest rates, but the political element is problematic because we live in a time when the two sides are increasingly entrenched in their views, showing little desire for wiggle room.
Despite that, studies suggest market participants remain enthusiastic about responsible investing, in particular, younger demographics who crave values-based investment solutions. That is to say advisors cannot take their eyes off the ESG ball. Not when clients are demanding access to these solution and not at a time when clients believe advisors are useful when it comes to attaining ESG advice and building portfolios to that effect.
Key to Younger Clients
Advisors looking for avenues to better connect with younger clients have a friend in responsible investing. Data confirm as much.
“From a generational standpoint, our survey shows that Generation Z (born 1997-2012) and millennial (born 1981-96) investors are more likely than Generation X (born 1965-80) and baby boomer investors (born 1946-64) to agree that responsible investing should always be part of the investment process (92% vs. 68%, respectively),” according to Nuveen’s seventh annual survey on responsible investing. “The finding could reflect that older cohorts of investors are nearer to retirement, and are potentially more concerned about a shorter timeframe in which to recover losses.”
More tidbits underscore the point that advisors need to be well-versed in responsible for today’s increasingly value-oriented investors. For example, nearly two-thirds of those surveyed by Nuveen draw responsible investing conclusions based on their own research while 78% say it’s important to them that financial services firm managing there prioritizes responsible investing. Perhaps most importantly, many clients view responsible investing as a risk mitigation tool.
“In aggregate, however, more investors are linking responsible investing with risk mitigation. Two in three investors (68%) say that responsible investing is a strategy that can help mitigate market risk in their portfolio,” adds Nuveen.
Value in Responsible Investing
Advisors may have trepidation about ESG/responsible investing. That’s understandable. It’s not perfect in terms of performance – nothing is. Then there’s the political matter.
Still, clients, broadly speaking, see value in responsible. That says advisors can leverage the topic as a value-add opportunity, particularly because so many clients want education on this subject.
“Based on the results, we believe there is room for additional education and conversations with advisors focused on highlighting more directly how and why responsible investing can minimize investment risks. While most investors (80%) agree they are more likely to invest in RI if they see information on how it can help mitigate risk in a portfolio, about 55% say they don’t currently see how responsible investing can help mitigate risk,” concludes Nuveen.
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