A recent client survey provides a shocking reminder that the words we use have tremendous power over investors’ financial lives.
In 2023, my firm asked, among other things, if our clients were likely to talk to their advisors about “responsible investing” in the next year. Sixty-three percent of women said they were likely to do so, as did 45% of men. Then we asked the same question about “ESG investing.”
Enthusiasm plummeted. Clients were four times less likely to have the same conversation. They said ESG investing confused them, and they questioned what it would add to their portfolio. Yet just over half — 56% — said they were interested in ESG integration for their investment portfolios.
Words matter. At RBC Wealth Management, we use the umbrella term “responsible investing” to describe how you can use environmental, social and governance data — or extra-financial factors — that can be analyzed to make more informed investment decisions. We view ESG data as apolitical information that helps investors reach their desired financial goals.
But that may not be how your clients think about using ESG data.
Setting aside the fact that the term ESG has become a political football, human beings don’t always think rationally about money or long-term plans. Investors weigh their emotions and competing priorities when deciding how to construct their portfolios. In my experience, advisors can cut through the noise with clear language.
The first step is to acknowledge your clients’ goals. What level of returns do they need to accomplish those goals? What are their values, and how do they want to tangibly express those values? These aren’t just questions to frame responsible investing, they are the foundation of any planning conversation between a client and advisor. We use a workbook to help guide these conversations.
From there, I’ve seen the most success among advisors who speak plainly. Commonsense investment language is in danger of becoming a lost art. “ESG” is only one example of our industry’s love affair with acronyms and abstract, confusing phrases. ESG data are just another way to add transparency and due diligence to a portfolio so the investor can better understand the future risks and opportunities in their portfolio.
ESG is a means to an end, so talk about those ends. Do you and your client want to lower risk, whether in monetary or reputational terms? Are you looking for higher returns? Do you want more extra-financial data to weigh the virtues of your assets?
Finally, close with choice. The data is there to enhance return opportunities and to customize a client’s portfolio in accordance with their goals and values. It doesn’t need to be the client’s entire investment strategy, and it certainly shouldn’t be considered some kind of final verdict of the client’s politics and morality.
Responsible investing, or however you choose to describe the lens of extra-financial analysis, does not have to be a polarizing topic that prompts knee-jerk reactions and limits a client’s financial strategies. Advisors should educate themselves about the terminology for their clients’ sake, but we shouldn’t let the acronyms obscure the applications of this kind of strategy. Clarity is key to having the right conversations with your clients to construct an investment portfolio that reflects their values and financial objectives.
Kent McClanahan is vice president of responsible investing at RBC Wealth Management.
