Best practice ways to embed ESG in your practice

"The rationale behind a more thorough approach is that asking clients value-based questions will tempt them to answer in a way that reflects what they think others want to hear, not what they really want."

Sustainable investing is growing, both in supply and demand, but many advisers are still confused on how best to introduce the concept to their clients. At a high level, many advisers acknowledge the need to future-proof their practice and/or attract new types of clients. However, implementing an environmental, social and governance (ESG) solution for a client is still problematic for some. Questions like "how do I raise it with my clients?" remain commonplace, so we explore the road ahead and seek a reasoned approach to execution.

Under the "value proposition" lens, it is hard to argue that sustainable-investing solutions – including ESG portfolios – are a fad and should thus be excluded from your toolkit. In contrast, not offering ESG may actually isolate your business from a significant and growing portion of the market (as evidenced in Exhibit 1), where 72% of investors are at least moderately interested in ESG investing.

Exhibit 1 In a Morningstar study of 948 people, 72% of investors are likely to consider sustainably minded solutions; with broad-based interest across millennials, generation-X and baby boomers.

Distribution of My Sustainability Profile Preference Score (weighted)

Source: Morningstar research paper, April 2019: "The True Faces of Sustainable Investing: Busting the Myths Around ESG Investors".

The far more difficult question is how to deliver ESG solutions. For example, you may like the idea of offering ESG in your practice, but there is little evidence available to tell you the best way to structure the financial planning process. With this in mind, we break down two of the building blocks that are likely to be foundational in a great execution plan.

Raising ESG preferences with clients

At the heart of the financial planning profession is the concept of knowing your client. To date, most practices have adopted risk profiling and fact-finding tools to build a repeatable and robust framework that not only matches gaps to solutions but also meets the requirements of the regulators. But rarely has the fact-finding process included ESG or values-based preferences.

Whilst the debate about the best way to incorporate ESG into advisory practices continues, one observation from behavioural science appears clear – just asking the question is unlikely to be enough. The rationale behind a more thorough approach is that asking clients value-based questions will tempt them to answer in a way that reflects what they think others want to hear, not what they really want. That is, no one wants to say 'I'm not interested', because that seems cold-hearted. But no one wants to invest in something that doesn't align to what they really want either.

While this is an area ripe for development, to help make it practical, we offer three examples of ways advisers are currently raising ESG capabilities with existing clients. This list is not exhaustive as such, but intended to be thought provoking. Examples include:

  • An upfront announcement to the client base regarding a new capability or function, with the option to enquire if they are interested.
  • A structured approach to client annual reviews, perhaps using a pre-meeting checklist that asks the client to review their risk tolerance, goal setting and whether their financial plan is aligned to their life values (including ESG preferences).
  • An offer to the children of existing clients, perhaps as a marketing or value-adding exercise. This may appeal to older generations too, with an option to enquire if they are interested.

The key is to deepen the understanding of where clients' see themselves on the returns-driven to sustainably-driven spectrum, then making sure there is the capability to tailor the financial plan accordingly.

Find unique ways to show the impact

Take two investors with the same age, the same savings patterns and the same retirement goal-yet one is sustainably minded while the other is returns driven. They share a lot in common, but the messaging will not resonate equally.

If you can bring the ESG impact to life (see Exhibit 2 as an example), you are well on your way to changing the past performance conversation into a well-rounded assessment of value. Tying into the United Nations Sustainable Development Goals is one such effective way this may be done.

Exhibit 2 Demonstrating the impact is important. While the right approach depends on the goals of the client, it may change the way they think about value.

Diagram illustrating Exhibit 2 Demonstrating the impact

Image source: United Nations, accurate as at 30/04/2019. Please note, performance numbers are hypothetical and for illustrative purposes only.

The downside to offering ESG portfolios

Offering ESG portfolios is theoretically easy - using the client, impact and product foundations – however it is worth elaborating on potential downsides. For example, a common mistake we are already seeing in the industry is something we can simplistically label the "plug and play" approach to ESG. That is, a client shows a preference for ESG, so the adviser picks a handful of ESG funds and replaces the conventional holdings like-for-like. Such an approach is sub-optimal for many reasons, leading to a portfolio profile that can deviate considerably (both in risk and return) from the desired outcomes. For example, the ESG indexes tend to carry meaningfully different sector and size biases than traditional indexes, which can impact everything from credit quality to liquidity.

This leads to another important point. While we believe offering an ESG portfolio range has the ability to strengthen your practice, you do need to be ready for different conversations. Some of these conversations will be meaningfully positive (such as developing a deeper understanding of your clients' opinions and values), but others will be more challenging. One such example is that ESG portfolios can be expected to behave differently from conventional portfolios (tracking error from conventional benchmarks may be higher), so it does raise the prospect of how you'll handle relative performance-based queries.


Ask your everyday person on the street and they are increasingly preferring companies with a strong environmental record or those that embrace other developments such as gender equality and the like.

This movement is certainly not a fad, it is very real, and raises the interesting prospect to differentiate your value proposition.

The development of ESG products is likely to grow further and you have a great opportunity to strengthen your practice by using them. While the industry continues to grapple with the best way to incorporate ESG preferences into previously standardised practices, a foundational approach could see you step ahead.

The benefits of offering ESG solutions are likely to far outweigh the drawbacks, but there will be challenges. To support advisers in their journey, Morningstar has five ESG Managed Portfolios, aligned to Morningstar's established risk profiles and compatible with other leading risk tools. The portfolios are managed using Morningstar's distinctive long-term valuation-driven approach and use both active and passive funds with the aim to maximise the potential reward for risk while reducing the cost as far as possible. The portfolio management team draws on expertise from over 100 investment professionals around the world and are supported by Morningstar's industry-leading research, data, and thinking around ESG considerations.

Learn more about how Morningstar’s ESG Portfolios can help your business:

Tel 020 3107 2930