Although not an entirely new phenomenon, values-based investing has undoubtedly seen a surge in popularity in recent years. Twenty-six percent of U.S. assets under management now employ socially responsible investing strategies, a 38% increase since 2016, and that number is only poised to rise as investor interest grows.
Propelling this market growth, in large part, is the millennial generation, who are twice as likely as their older counterparts to seek out sustainable investing opportunities. This is, after all, a cohort that came of age during the Great Recession and witnessed the global effects of poor governance. They've seen the #MeToo movement precipitate shake-ups at the highest levels of corporate and political life, been privy to dire warnings regarding the health of our planet, and lived through the longest war in U.S. history. When placed in that context, it likely comes as little surprise that they rank values-based investing among the top three priorities when selecting a financial advisor.
Female investors, too, are a significant driving force behind the growing interest in values-based investing and, as they ascend the corporate ladder and inherit wealth, this demographic's influence is ever-growing. As of 2015, women controlled 51% (approximately $14 trillion) of personal wealth in the U.S.; they are on track to oversee $22 trillion by 2020.
For the purposes of this column, sustainable investing involves the integration of environmental, social and governance (ESG) criteria to subsequently allocate capital toward companies that consciously treat their resources — whether it's human capital, their surrounding communities or the planet — with respect. This philosophy certainly represents a tremendous opportunity for investment advisors to establish a competitive advantage and grow their practice, yet many struggle to reconcile that burgeoning client interest with commensurate adoption of sustainable investing strategies. From concerns about companies' true alignment with personal values, to ambiguity regarding nomenclature, there is a largely untapped chance for financial advisors to educate themselves — and their clients — about the benefits of investing in sustainable companies. That's why, as client demand for sustainable investing expands, we believe there are some key questions investment advisors should expect, welcome and be prepared to answer:
1. Performance: "Does sustainable investing mean I have to compromise returns?"
One thing holding advisors back from embracing sustainable investing is confusion around financial performance. According to Cerruli Associates, more than a third (35%) of advisors who do not currently employ ESG strategies cite concerns about its potential impact on performance as a deterrent, with 75% noting that it is at least a moderately important factor in their decision-making process.
We believe that companies that prioritize responsible and equitable business practices — including environmental safety, workplace diversity and strong corporate governance — will, in the long run, outperform those that do not. And we're not alone in our thinking: Data from financial institutions such as JPMorgan, BlackRock and Goldman Sachs also suggests that the consideration of ESG factors can provide investment advisors with full context on the risks of investing in a company without compromising returns — and, in some cases, even exceed the benchmark.
We suggest that, where possible, advisors reference empirical data and leverage any available strategy backtesting tools to enhance investors' confidence in sustainable investing. There is a growing body of research that uses backtesting simulation to illustrate the impact of ESG integration on various investment strategies. One such report from MSCI found that integration of ESG criteria into passive strategies generally enhanced risk-adjusted performance over a decade-long period, tilting the portfolio toward higher-quality and lower-volatility securities.
2. Product: "How can I align my investment portfolio with my values?"
Developing a robust understanding of your clients' values can be a complex process that involves multiple considerations and trade-offs, often not so simply distilled to "reducing carbon emissions" or "investing in clean energy." For example, many clients will approach an investment advisor with the goal of divesting from oil and gas while simultaneously investing in companies that are the largest supporters of clean energy. However, the inconvenient reality around clean energy is that some of the largest oil companies have invested heavily into renewables. That's why, before embarking on a sustainability journey with your client, it's important to first engage them in a candid conversation to clarify their expectations and explain the trade-offs inherent to investing for environmental and societal impact, while concurrently discussing traditional metrics such as returns, index tracking error and risk tolerance.
Once you've thoroughly explored clients' needs, there is no shortage of sustainable investment products in the marketplace — per EY, the number of available sustainable investing funds has nearly tripled since 2008. However, not all products are created equal, and clients have little visibility into whether these "off-the-shelf" mutual funds or exchange-traded funds (ETFs) don't match a client's specific priorities or offer enough flexibility to accommodate them.
Jay Lipman is a co-founder and president of 
