ESG Investing for Tomorrow: A Guide for Financial Advisors
Nearly two decades after the term “ESG” (Environmental, Social, and Governance) was coined by the UN, these criteria have become integral to the strategies of some of the world’s largest companies, pension funds, foundations, endowments, and asset managers. As we move into 2025, it’s essential for financial advisors to have a good working knowledge ESG.
Why ESG Investing is On The Rise
Several factors have contributed to the momentum behind ESG investing, including:
- Policy shifts: Increasing emphasis on issues such as diversity, climate action, and corporate responsibility.
- Financial incentives: ESG-compliant companies are often seen as lower-risk, which can translate into easier access to capital.
- Greater visibility: The topic of ESG has entered the public consciousness, and increasingly robust data analytics and transparent reporting have made it more visible to investors.
- Investor demand: Many investors now seek to align their portfolios with their personal values—making ESG an area of growing interest for advisors and clients alike.
The Current State of ESG Investing
ESG investing is expanding rapidly, although not without some controversy.
In terms of growth, global ESG funds attracted $10.4 billion in new assets in Q3 2024, up from $6.8 billion in Q2 and $4.8 billion in Q1. Forecasts suggest that ESG assets could surpass $40 trillion by 2030, potentially accounting for nearly 30% of global investments.1
While ESG’s popularity grows, the three largest U.S. asset managers - BlackRock, State Street, and Vanguard - recently reduced their support for shareholder ESG proposals, in part due to political pressures.2
However, many public companies are continuing to advance ESG initiatives independently. For instance, in 2024, 82.6% of S&P 500 companies reported workforce diversity data, and 85% of large-cap firms disclosed greenhouse gas emissions.3
Discussing ESG Investing with Clients
When it comes to ESG investing, the conversation starts with understanding each client’s unique goals and values. Here are some ways to help clients explore ESG:
- Educate on ESG fundamentals: Clients may wonder if ESG affects returns. Walk them through the benefits, risks, and trade-offs of ESG investments.
- Analyze investment performance: By comparing ESG funds with traditional options, you can clarify performance implications and help clients make informed decisions.
- Explore alternatives: ESG investing goes beyond mutual funds. For example, green bonds are used to raise money for climate and environmental projects, and impact investing focuses on initiatives that aim for a financial return and a positive impact at the same time.
- Align with the bigger picture: Of course, it’s always essential to make sure that any ESG investment is aligned with a client’s overall financial plan, long-term goals, and risk tolerance.
What if a client is not interested in ESG? No problem. Even if you personally believe ESG is important, don’t push it. Take heart in knowing that every investor who owns large public companies in their portfolio will have significant exposure to ESG criteria by default.
Looking Ahead to 2025
Expect ESG to evolve in tandem with government policies, corporate practices, and shifting investor demographics. Younger clients, in particular, may express a preference for ESG-focused portfolios.
To stay ahead, consider integrating ESG discussions into your client onboarding and annual review processes. While not every client will opt for ESG investments, being well-versed in this area will position you to provide valuable guidance to those who do.
And when your clients are ready to incorporate ESG into their portfolios, you can trust that Beneva will be here to support you with the quality investment solutions you need.