4 Things to Know Before Talking to Clients About ESG Investing

It’s clear that sustainable investing is no longer a niche topic in finance. Moreover, recent human rights violations caused by geopolitical issues may again put sustainability-related issues in the spotlight.

One thing is certain, financial professionals must be able to effectively introduce and talk about sustainable investing with clients. This is no easy task, as sustainable investing is multidimensional, it has novel nomenclature, and it lacks industry-level consensus around its core features.

To help advisors navigate these conversations, our latest research aimed to better understand how different ways of communicating about sustainable investing affect investors’ decisions, specifically regarding their willingness to invest and the amount they choose to invest.

There Is No One-Size-Fits-All Approach to Talking About Sustainable Investing

Our research presents a nuanced narrative regarding the impact of sustainable-investing options in retirement plan descriptions. Our analyses suggest that wording matters and presenting sustainable-investing options in the wrong way may dissuade some individuals from contributing to the plan.

In our study, participants completed a hypothetical investing scenario in which they were given information about a traditional 401(k) retirement plan and asked whether they wanted to participate in it. If they chose to participate, they then were asked for their desired contribution rate. We randomly assigned participants to one of seven conditions that determined the information they received. Participants in four of the conditions were given information regarding sustainable investing.

Overall, we found mixed results. None of the conditions showed a significant increase in contribution rate. However, we found that participants in two arms--one that contained information about sustainable investing and another about shareholder participation--were less likely to participate in the plan and contributed less when they did participate.

After combing through our data, here are a few of our key takeaways:

• For most investors, making sure a plan fits their financial needs still comes first. In a follow-up study, we tested a sequential approach to introducing sustainable investing. In this study we first presented all participants with a standard 401(k) plan description and asked whether they wanted to participate and at what contribution rate, then we presented additional sustainable investment options. Using this approach, we did find that the negative impact of the sustainable options was mitigated. These findings emphasize that, for many investors, ensuring that a plan meets their financial needs still comes first.
• Investing decisions are already complex and difficult for many investors. Our findings are also a reminder of how difficult investing decisions are for many investors, which may be a contributing factor to low participation rates in retirement plans. Although many investors may benefit from or are interested in sustainable investing, financial professionals must be careful not to overwhelm investors when introducing this topic.
• Different types of sustainable investing will be attractive to some people but may elicit a negative reaction from others. We did find a small relationship between the contribution rates and the political ideology of participants in the arm focused on using sustainable investing to invest in causes you care about and manage environmental, social, and governance risk. Participants who were more conservative politically contributed less to the plan. This finding points to how multifaceted sustainable investing is and how different aspects may be of interest to different investors.
• Many investors may not have a strong sense of all that sustainable investing has to offer. Given the multiple approaches available regarding sustainable investing, many investors may not completely understand all of the ESG strategies at their disposal. Practically speaking, this means that many investors may have a weakly held preference regarding sustainable investing--one that can change, either positively or negatively, upon learning more about it.

Altogether, our findings indicate that investors continue to prioritize their financial needs first when considering an investing opportunity, which is not too surprising. However, given the promise and wide-reaching benefits of sustainable investing, many investors may be interested in all it has to offer. Also, though it’s impossible to ignore sustainable investing’s growing popularity in the finance industry, we must acknowledge that it may still be a novel topic for many investors, one they may be interested in after learning more about it.