Advisors have a key role to play in educating their clients
Advisors have a key role to play in educating their clients
By Kelly Mahoney
A recent Gallup poll found that 68 percent of investors are likely to avoid stocks or funds invested in companies that contradict their values, and 48 percent are very or somewhat interested in sustainable investing. However, only about 10 percent of the investors surveyed are currently invested in funds the study defines as "sustainable." The disconnect demonstrates that investors may have concerns that prevent them from building more sustainable investment portfolios.
Ethic believes wealth advisors have an important role in educating their clients about sustainable investing. Here are our views on some of the top challenges investors face today and how wealth advisors can help clients navigate them.
Myth 1: Sustainable Investing Means Taking a Loss
This first concern is an old fallacy, as there’s abundant evidence showing that sustainable investing doesn’t mean investors have to take a loss. While it’s true that inflation, recession fears, and a shaky economy led to a slight underperformance of global sustainability funds in 2022, the demand for these funds remained strong. Throughout the year, positive inflows of $115 billion into sustainable funds stood in stark comparison to the steady stream of outflows in traditional funds. This signifies that while short-term market factors can impact sustainable funds, investor demand for these funds serves as a counterweight that prevents them from tanking.
At Ethic, we think sustainable investing becomes synonymous with full-information investing when it’s done well. Rather than simply looking at how index investments are based on basic information, like market value, we examine a vast array of data about each company, such as their impact on climate change, gender and racial discrimination, or simply the strength and quality of their leadership. As with all investments, there are no guarantees — but sustainable investing isn’t altruism. It’s sound investing that helps investors balance growth and impact.
Myth 2: Greenwashing in Corporate Disclosures
According to a 2022 global survey, 87 percent of investors suspect that there is some greenwashing in corporate disclosures. It’s a valid concern. In another global survey the same year, 80 percent of CEOs and C-Suite executives gave above-average ratings to their organization’s environmental sustainability efforts, but 58 percent said their companies are guilty of greenwashing (that number jumps to 72 percent in North America). Clearly, more transparency is needed.
We believe the answer is creating a 360° view, starting with assessing the methodology the company used to create the data along with their internal policies and procedures. We then make our own analysis of third-party evaluations of the policies and procedures and how rigorously the company is applying the rules. Finally, we look at public sentiment and opinion from respected media outlets. By creating this complete view using research and data, we are able to get a more transparent and accurate picture.
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Myth 3: Sustainable Investing is Too Radical
While there are certainly investors who are 100 percent impact- and sustainability-focused, there are also those we refer to as “sustainability curious” or even “sustainability skeptics” who believe that sustainable investing may be either too radical or not aligned with their politics.
We liken sustainability investing attitudes to the Innovation Adoption Curve, which organizes people by their willingness to adopt new ideas or technology. Our approach is to meet investors where they are and focus the conversation on their unique values and what they care about. We then create a strategy aligned with their values and areas of concern. The discussion around sustainability can be highly politicized so it’s important to bring it back to personal beliefs and what each person feels comfortable with, no matter if they are already focused on investing more sustainably or are just at the beginning of their journey.
Myth 4: Fear of Being Boxed In
Related to the idea that sustainable investing is too radical is the fear that an investor will be boxed into a rigid strategy. Our Values Mapping Exercise (VME) platform is a simple and quick tool advisors use to learn about an investor’s unique values and how those values affect their investing decisions.
Values define who an investor is as a person, how they spend their personal time, and how they think about sustainability in other areas of their life beyond investing. Gaining a more comprehensive understanding of who the investor is and what they care about allows wealth advisors to create a uniquely personal investment strategy.
Myth 5: Different Values Among Generations
There's a concern that different values among generations of a family can negatively affect their investment strategy and ultimately result in the family losing money. While it is true that there is often a values gap in multi-generational families, there is almost always common ground.
The key is identifying the values and issues that all generations share, but we understand that initiating that conversation can intimidate wealth advisors. They may have built strong relationships with older generations and want to keep them strong while also building relationships with younger family members.
Using the VME, advisors can help families identify their values and find that common ground. The advisor can then use the information gleaned from the exercise to facilitate a conversation among family members about an investment strategy that works for everyone. Aside from helping advisors better serve their clients, the VME is a great differentiator from a marketing perspective.
The discrepancy between the percentage of people interested in sustainable investing and current investors highlights a disconnect borne of false assumptions and genuine concerns. Wealth advisors have an essential role to play in educating their clients and helping them navigate their concerns so they are at the point where they can comfortably invest. Ethic is here to support wealth advisors in this vital mission.
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