Getting Started with ESG – A Guide for Advisors

According to Fidelity, “ESG investing is far from a passing fad.”¹ It won’t surprise you that we agree with this statement, but even we are (pleasantly) impressed by this year’s fund flows. While 2019 saw net inflows into U.S. sustainable funds of $21.4 billion – over four times higher than in any preceding year – by the end of Q3 2020 inflows had already reached $30.7 billion.²

However, many advisors and asset owners still find themselves on the sidelines, unsure how to integrate sustainable investing into their businesses. Alleviating this confusion is why we focus so much of our attention on education. And, why we were grateful to be asked to share our experiences in Fidelity’s recent whitepaper, “ESG Investing: An Advisor’s Guide to Strategies, Paths, and Approaches,” which provides practical tips to help financial professionals navigate their own, authentic path.

The sustainable investing landscape has evolved so much in the last decade. From the evolution and increased adoption of standards and protocols to the propagation of new data sets, there are more ways to create an ESG portfolio than ever, and this is unlikely to slow down. So, knowing where to start to diligence the universe is a big task in and of itself.

Fidelity suggests getting philosophical as a first step and poses these questions²:

• Why do you want to offer ESG investing as a firm, and what goals will it achieve?
• Do you want to add an offering to stay relevant to evolving investor needs?
• How does it align with your firm’s existing philosophy and approach?
• How will you define success with respect to your firm’s ESG strategy?

These may seem obvious but, given the myriad of exciting ways to implement ESG investing, asking the right questions at the outset will help ensure strategic alignment. We also recommend ensuring everyone on your team is using common definitions of all terms. While “ESG,” “sustainable investing,” “impact investing,” and “socially responsible investing” are often used interchangeably, even small nuances in how each person understands these terms could result in challenges when moving to implementation.

We define ESG as the GPS of Investing® and consider it a foundational data set upon which all our sustainable investing portfolios are built. It is both connected to, but can be distinguishable from, values-based investing and impact investing.

Once you’re clear on your internal positioning, subsequent decisions that determine your approach should be easier to resolve.  Fidelity suggests the following questions² to help clarify how you will create your offerings:

• Where does your firm see itself on the ESG spectrum: Will you outsource ESG investing, use a do-it yourself approach, or help investors make a direct impact?
• What resources will you need to be successful? (Presumably, you will need more resources and expertise if you are not working with a third party.)
  • Are you willing to hire more staff, train and educate them differently, buy new data sources, etc.?
  • What is your time frame for launching even a “minimum viable product” ESG offering?
• How will you measure success?

When you’ve clarified your philosophy and laid out your plan, communicating to clients takes center stage. As Jeff Gitterman shares in Fidelity’s paper, it’s important to understand why and how ESG investing may resonate with your clients, as well as articulating why it resonates with you. Discussing these topics can be a great way to connect with your clients and bring new prospects into your firm.