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The Financial Advisor’s Role in Sustainable Investing

Increasingly, ESG considerations are priority objectives for corporate leadership, key inputs for how asset managers deploy their investments, and how affluent and young investors select investments … and their financial advisors.

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    The Financial Advisor’s Role in Sustainable Investing

    The Financial Advisor’s Role in Sustainable Investing

    Sustainable investing is not a fad. Following responsible environmental, social and governance (ESG) practices is the new face of capitalism. Increasingly, ESG considerations are priority objectives for corporate leadership, key inputs for how asset managers deploy their investments and how affluent and young investors select investments … and their financial advisors.

    Three Reasons Advisors Need to Care About ESG

    1. It’s good for business. The next generation of investors, as well as affluent investors, has incorporated sustainable criteria as an integral element of their investment process. Advisors who are indifferent to ESG investing have little likelihood of successfully competing against other, more ESG-knowledgeable advisors to win the business of these critical growth niches.
    2. Sustainable investing improves risk-adjusted returns. While the evidence of ESG generating improved returns is mixed, the research is clear that implementing ESG criteria can reduce overall portfolio risk. Poor governance or harmful labor practices will eventually reflect in share prices, whether through event risk or through slow value destruction.
    3. ESG risks can spill over and affect industry sectors and the general economy. The poor governance at one social media company can lead to costly regulation for the whole industry, while the failure to address climate change will impact every asset class from equities to municipal bonds.

    Developing a Sustainable Investing Awareness

    Not all clients are convinced that sustainable investing is the approach to take with their portfolios. Accordingly, an advisor shouldn’t feel as if he or she needs to convert clients, though they should be prepared to identify and meet the needs of those investors who place a priority on responsible investing.

    Advisors who want to integrate sustainability into their practice should:

    • Become More Knowledgeable about ESG Investments—Advisors should educate themselves about sustainable investing, the myriad forms it takes and the investments that are available to meet their clients’ responsible investing objectives.
    • Make Sustainable Investing Part of the Client Discovery Process—Just as advisors seek to learn about a client’s unique set of financial goals and risk tolerance, they should also begin asking about clients’ sustainable investing goals and how they might want to see it executed in the investments they pursue.
    • Incorporate Sustainable Performance into Quarterly Client Reviews—For the client with a priority on responsible investing, portfolio return performance is not enough; it may even be a secondary priority. He or she also wants to know how these companies are performing against ESG benchmarks.

    To provide one glaring example, in the fourth quarter of 2019 there was an increase of 137 percent in the number of S&P 500 companies citing ESG on earnings calls versus the prior quarter.1 ESG is going mainstream; those advisors who ignore it do so to their own detriment.

    Source:

    1. https://insight.factset.com/137-increase-in-sp-500-companies-citing-esg-on-earnings-calls-in-q4-vs.-q3

    See referenced disclosure (2) at http://blog.americanportfolios.com/disclosures/   

    About The Author

    Lon T. Dolber

     

    CEO, CIO & President of American Portfolios Financial Services, Inc. (APFS) 
    631.439.4600, ext. 106 

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