Integrating ESG Investing Into Advisory Portfolios

ESG investing incorporates environmental, social and governance factors into investment decisions. And while it’s something investors seem interested in, most aren’t implementing it in their own portfolios. A 2025 Gallup poll found that 48% of investors said they’d be interested in purchasing ESG investments, but only 10% are currently invested in sustainable funds¹. Developing an ESG integration investment strategy could help you reach a broader range of clients and expand your current offerings.

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ESG Integration Explained

ESG investing is about choosing stocks and other investments that reflect an investor’s beliefs and values. There are several ways to decide which stocks to include in a sustainable investment strategy. Two of the most popular are integration and exclusion. Here’s how the two strategies compare:

• ESG integration is an investment strategy that pairs environmental, social and governance considerations with fundamental analysis. With integration, the objective is to find companies that actively practice ESG principles and offer a promising rate of return.
• Exclusion, on the other hand, is focused on avoiding companies that do not hold ESG values or reflect the values of the investor. For example, a client who’s concerned about climate change may wish to exclude oil and gas companies from their portfolio.

Integration keeps ESG principles firmly in sight but also considers the potential for returns, based on a particular asset allocation. ESG factors are a supplement and offer support to traditional financial analysis, rather than a replacement for it. The end goal is to construct a portfolio that reflects the investor’s values while producing better returns.

It’s also important to note that ESG integration is different from thematic investing. This type of investment strategy centers on choosing companies that reflect a specific theme, such as gender equality of diversity, and have growth potential.

Implementing an ESG Integration Investment Strategy

Incorporating ESG into your financial planning approach is a multi-step process. It begins with laying the groundwork for how ESG factors will influence investment decision-making.

Ask yourself these questions:

• Which ESG factors will you focus on, as they relate to an investment’s performance and overall sustainability?
• How will you apply those factors across each layer of a client’s financial plan?
• Where will you source information about ESG factors for individual investments?

That last question is particularly important, as the quality of the underlying information you use can directly influence your outcomes. Some reliable sources of information for ESG data include MSCI’s ESG Ratings and S&P Global’s ESG Scores and Raw Data, though there are several other sources you might consider.

These and similar resources allow you to rate the materiality of ESG factors for specific companies. Materiality refers to the correlation between positive impacts on society or the government, and positive financial outcomes associated with an investment’s performance.

Material factors include things like:

• Carbon emissions
• Biodiversity
• Water conservation
• Health and safety
• Product quality
• Accounting practices
• Diversity
• Financial transparency

If you’re reviewing ratings from multiple sources, note that different scoring models may rely on different information to generate ratings. Apples-to-apples comparisons matter, and it’s important to look at companies within the same industry for the most accurate results. Also, remember that ESG ratings or scores are not 100% accurate predictors of an investment’s future performance.

Once you’ve identified material factors, the final step is integrating them into your financial planning approach. Again, what you’re looking for is a positive correlation between an investment’s ESG factors and its performance, as measured by fundamentals. Fundamentals include a company’s assets, liabilities and earnings.

You may research ESG ratings for individual companies, mutual funds or exchange-traded funds (ETFs). If you’re examining ESG mutual funds or ETFs, be sure to take a closer look at the fine print. Review the fund manager’s ESG integration policies to understand how investments are selected and which ratings system is used. Consider also the full range of underlying holdings, as well as the fund’s historical performance, expense ratio and turnover rate.

Adding ESG investments to client portfolios is a matter of fit. The investments you recommend should represent the client’s values, as well as their risk tolerance and goals. Tax optimization is also a factor, and you should be aware of any potential tax implications before making a significant shift toward ESG investments in a client’s portfolio.

Talking to Your Clients About ESG Integration

ESG is a controversial topic, and it’s important to consider how the integration of environmental, social and governance factors into your planning strategy may be received by your clients. Expect some of them to be more receptive than others.

Polling your clients with an anonymous survey can help you gain insight into their feelings and uncover any potential objections they may have about being advised in this area. For example, clients may question how ESG integration will further their goals or whether they can expect the same level of returns they’re realizing now.

Cost may be another concern. ESG funds may carry higher expense ratios than other types of mutual funds or ETFs, which can make a difference in your clients’ long-term returns. Transparency is critical, as you want your clients to be fully aware of what they’ll pay to integrate ESG into their financial plans.

Modeling and visualizations can help you demonstrate how much value ESG investments may add to their portfolios. You might use portfolio visualizer tools to illustrate different outcomes for ESG strategies, based on the client’s risk tolerance, time horizon and goals.

Bottom Line

An ESG integration investment strategy may be appealing to clients who want to build a socially or environmentally conscious portfolio. Once you know how ESG integration works, you can be better positioned to develop a framework for implementing it in your business, so you can better serve your clients’ needs.

Tips for Growing Your Advisory Business

• Investors have a variety of choices when deciding where to seek professional financial advice. If you’re looking for a way to make a direct connection with prospects, you might consider working with an advisor marketing platform like SmartAsset AMP. SmartAsset AMP (Advisor Marketing Platform) is a holistic marketing service financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
• Identifying your ideal client can better inform how you shape your marketing plans. For instance, you might develop a buyer persona that represents a hypothetical version of the ideal client you want to work with. A detailed persona that speaks to a prospective client’s likes and dislikes, financial fears and emotional biases, and overall goals can act as a guide for developing a marketing strategy that produces tangible results.

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