BACK TO THE BOUTIQUE INVESTOR BLOG 5 Questions Every Advisor Should Ask Their Clients About ESG Kevin T. Cooper, CFA VICE PRESIDENT | HEAD OF INVESTMENT RESEARCH It’s impossible to ignore: The investing world is changing, and ESG investing—investing for environmental, social, and governance purposes—is on an exponential growth path, on track to represent more than a third1 of the world’s $140 trillion in assets by 2025. And with 7 in 10 adults in the U.S.2 expressing interest in investments that look beyond financial considerations to consider a company’s carbon emissions, labor practices, or regulatory and compliance history, ESG investing can also be a big opportunity for advisors—if they ask their clients the right questions. 1. What do you know about ESG investing? Some clients will be familiar—even very familiar—with ESG investing. Others may be confused by the acronym or confuse ESG investing with impact investing, sustainable, or responsible investing. Think of ESG as a framework or set of criteria as opposed to a strategy. So open the conversation with a broad question to get a baseline understanding from clients about what they know. No matter how long we’ve known a client, their answers are often surprising—and can help guide the rest of the discussion. 2. Does aligning your investments with your values matter to you or your family? ESG investing allows investors to screen out things they don’t like—think tobacco or munitions—and lean into things they do care about, like climate or racial and gender equity. But it’s not just about their values. Many clients are thinking about who to pass their money along to and the future economy. If so, they might want to consider how younger generations tend to be more engaged on ESG and give their business to companies who share their commitment to sustainability. 3. Did you know that ESG investing could mitigate portfolio risk? Portfolio risk should be a major concern for the majority of investors who are focused on the bottom line. An important element in managing risk is trying to quantify potential losses. For example, when it comes to issues like climate, studies suggest financial institutions that underestimate climate risk in their lending portfolios could face losses to the tune of $1 trillion.3 ESG also has the potential to direct investors away from companies that might pose a financial risk, such as those possibly involved in human rights abuses. It can help clients avoid companies exposed to climate risks, which may be failing to take into account the effects climate change might have on their business models or supply chains.4 4. Are you interested in finding more outperforming companies for your portfolio? For a long time, investors believed that investing for nonfinancial reasons meant sacrificing investment performance. But with ESG funds showing strong financial performance compared with peers in recent years, that myth has largely been put to rest. Indeed, long before the COVID-19 pandemic, studies showed that many companies that rate highly on their ESG scores tended to outperform their competitors and that good sustainability practices had a positive impact on stock price performance.5 Because ESG tends to focus on a company’s long-term strategy, using ESG criteria to invest can help position client portfolios for the long term. 5. Do you think an audit of your portfolio makes sense? As Peter Lynch used to say, “Know what you own.” A portfolio audit doesn’t have to explicitly be about ESG—it’s always smart for clients to do a deep dive into what they own and why they own it. Even the most diligent clients may be surprised to discover how that mining company stock got into their portfolios or how well that tech ETF of companies building next-gen energy storage is performing. Beginning the ESG Conversation Ultimately, ESG investing isn’t about jumping on a trend or buying new funds. It’s about starting a conversation about long-term investing with generational implications. It’s about looking to the future for new opportunities, for advisors and clients alike. 1 “ESG Assets Rising to $50 Trillion Will Reshape $140.5 Trillion of Global AUM by 2025, Finds Bloomberg Intelligence,” Bloomberg, July 21, 2021, https://www.bloomberg.com/company/press/esg-assets-rising-to-50-trillion-will-reshape-140-5-trillion-of-global-aum-by-2025-finds-bloomberg-intelligence/ 2 “Who Cares About ESG Investing?” Steve Wendell, Samantha Lamas, Morningstar, May 3, 2019, https://www.morningstar.com/articles/926921/who-cares-about-esg-investing 3 “The Time to Green Finance, Financial Services Disclosure Report 2020,” CDP, 2020, https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/741/original/CDP-Financial-Services-Disclosure-Report-2020.pdf?1619537981 4 “ESG Investing Is About Long-Term Risk Management,” Alex Bryan, CFA, Morningstar, July 14, 2020, https://www.morningstar.com/articles/991535/esg-investing-is-about-long-term-risk-management 5 “From the Stockholder to the Stakeholder,” Gordon L. Clark, Andreas Feiner, Michael Viehs, Arabesque, March 2015, https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf Past performance is not a guarantee of future results. Investing involves risk, including possible loss of principal. The preceding commentary does not constitute investment advice, an investment recommendation, or is it an offer, or solicitation to purchase, or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. Applying ESG investment criteria to investments may result in the selection or exclusion of securities of certain issuers for reasons other than performance, and may underperform investments that do not utilize an ESG investment strategy. The application of an ESG strategy may affect an investment’s exposure to certain companies, sectors, regions, countries, or types of investments, which could negatively impact performance depending on whether such investments are in or out of favor. Applying ESG criteria to investment decisions is qualitative and subjective by nature, and there is no guarantee that the criteria utilized or any judgment exercised by an investment manager will reflect the beliefs or values of any particular investor. Not FDIC Insured | May Lose Value | Not Bank Guaranteed. © 2022 AMG Funds LLC. All rights reserved.