How to Have Better ESG Conversations With Your Clients

ESG—environmental, social, and governance--investing has grown in prominence in recent years amid increasing interest in sustainability. And due to widespread media attention, there is a possibility that your clients will ask about it, if they haven’t already. Financial professionals who demonstrate a thorough understanding of ESG investing may be able to differentiate themselves from the competition, retain multigenerational clients, and grow their book of business. 

Younger generations present a significant opportunity, as ESG will likely influence where they put their money. According to a 2021 McKinsey study, those aged 25-44 are much more inclined to consider ESG when choosing investments, suggesting that sustainability will be increasingly relevant in investing conversations.

If a client or plan participant is curious about ESG, start by determining how much they already know. If they’re unfamiliar with sustainable investing, start by providing a foundation of the three factors and why they matter:

• Environmental factors in an investing context may involve looking at a company’s carbon footprint, its plan to reduce its footprint, or whether its operations are responsible for pollution. Additionally, investors can explore a company’s current and long-term resource and materials usage and how their operations impact the environment.   
• Social considerations relate to how a company’s actions affect society and how society perceives those actions. For example, many Western corporations stopped operating in Russia after the invasion of Ukraine, in part due to public pressure. Other factors include how companies treat their employees, their corporate culture and meritocracy, and their general stewardship of the communities in which they do business. This factor is the least well-defined of the three. 
• Governance is focused on the importance of companies having good leadership and oversight at the management and board levels. Many corporate scandals (Enron, for example) have occurred because leaders looked the other way, resulting in disastrous consequences for investors. Other elements to consider include executive compensation, involvement in lobbying, and accounting and taxation policies.

It’s important for your clients to have this foundation to inform later conversations about portfolio objectives. For example, ensure that your client understands that the set of investment criteria represented by ESG provides an additional layer of assessment and insights that corporate financials only sometimes offer.

Because environmental, social, and governance factors are material and can impact performance, we embed these considerations into the investment process at T. Rowe Price. In supplementing traditional fundamental security analysis with an ESG lens, we get a comprehensive view of a company’s prospects and can make more informed investment decisions for our clients.