The ESG Revolution: How America’s Top Financial Advisors Are Building a Greener Future

Over the last few years, ESG (Environmental, Social, and Governance) investing has become a crucial investment strategy in wealth management. Investors keenly consider non-financial factors like ESG along with financial indicators to optimise their financial return and build a sustainable portfolio.

Consider an example of a 28-year-old investor, Ava, who follows a plant-based diet. She is passionate about sustainability and wants her investment portfolio to be aligned with her values of supporting animal welfare and environmental concerns. Her financial advisor, James, educated her on the availability of ESG funds that invest in businesses that follow sustainability practices. He also helped her build an investment portfolio through ESG investing strategies that align with her values and optimize returns based on her goals and risk tolerance. Financial advisors like James are bridging the gap between purpose and profit to build a greener future.

What is ESG Investing?

ESG investing, or sustainable financial planning is building an eco-conscious investment portfolio by investing in assets and businesses across diverse sectors that embrace sustainable practices and contribute towards a greener planet. 

An Overview of the Sustainability Movement in Investing

According to a “Trends Report” by US SIF, a trade group for the US sustainable investing industry, the size of the US ESG investment market is USD 6.5 trillion, nearly 12% of the overall market size, valued at USD 52.5 trillion. The report also highlights climate action and clean energy as top ESG investing priorities. ¹

That suggests, ESG investing is no longer a niche concept. It is a mainstream investing strategy with a wide range of options for investors such as ESG funds, green ETFs and ESG stocks. 

Here are the major drivers of sustainable investing trend:

• Institutional investors’ growing interest in ESG investing 

Due to rising demand from its beneficiaries and members, they are increasing their allocation towards long-term and sustainable assets. For instance, in September 2024, Bank of America made the largest investment in carbon capture technology of USD 205 million to an ethanol producer in North Dakota.²

• Growing awareness among retail investors

With a growing number of new ESG products, financial advisors in the US are educating retail investors about sustainable investing strategies. Some of the trending ESG investing themes are climate action, water solutions, healthcare, nature and biodiversity, community development, financial inclusions, etc. Here are a few important data to support this:

• World’s leading fund managers like Blackrock, State Street, Vanguard, Fidelity Investments, etc. have rolled out many sustainable funds and ESG investments for their clients over the years, though they faced a political backlash last year.³ Blackrock’s Chairman states in his letter to investors in 2024 that the company invests over USD 138 billion in energy transmission strategy.⁴

• Morgan Stanley’s  “ Sustainable Signals’’ report published in 2024 shows the rising demand for sustainable investing among individual investors. As per the report, 57% of investor globally say their interest in ESG investments has grown in the last two years, and 54% are ready to boost their allocations into sustainable investments in coming years. More than 77% of investors are interested in investing in stocks or funds that can deliver optimal returns while positively impacting the environment and society.^{5 and 6}

• Performance of ESG Investments

ESG investments perform well due to their sustainable business practice and better risk management. As per the report by the Institute for Energy Economics and Financial Analysis, ESG funds have outperformed traditional funds. In 2023, ESG funds generated a return of 12.6% in comparison to traditional funds that delivered an 8.6% return.⁷

Latest Trends in ESG Investing

With financial advisors helping investors to identify their goals and creating a roadmap for their ESG investing journey, the ESG investing market is experiencing significant shifts with time. The evolving regulatory environment and changing political and market dynamics are reshaping the future of ESG investing. Here are some latest trends in ESG investing:

• Regulatory Push for ESG Standards

The U.S. Securities and Exchange Commission (SEC) is standardizing ESG disclosures for companies that promote ESG practices in their public offerings. Companies are required to provide clear sustainability reports⁸.

For example, companies like General Electric and Tesla that promote clean energy are now required to provide clearer reports of sustainability, including labour practices and supply chain ethics along with carbon footprint.

• Greenwashing Practices Scrutiny

Investors are becoming more skeptical of companies making false ESG claims or greenwashing. Such false claim practices are under scrutiny by the legislators and regulatory bodies.⁹

For example, the BNY Mellon unit faced legal scrutiny and paid a fine of over USD 1.5 million for alleged misstatement in the ESG fund. The U.S. Securities and Exchange Commission (SEC) fined USD 19 million to DWS, a subsidiary of Deutsche Bank following greenwashing scrutiny.^{10 and 11}

• AI-Driven ESG Data Analysis

Financial advisors are using AI and data analytics to assess ESG risks and opportunities more accurately. AI-driven ESG data provides insights into the ESG practices of business. Metrics like ESG risk score, social risk score, environment risk score, etc., help in evaluating ethical performance and sustainability. There are also various AI tools for investment advisors to analyse ESG data to provide unbiased advice to their investors.

For example, the world’s largest asset managers like Vanguard and Blackrock are integrating AI-driven ESG analytics for evaluating the impact of climate risk on their investments. 

• Increased Focus on Climate-Resilient Investment Portfolios

As per the US SIF Trends Report 2024/2025, climate change remained the dominant theme in ESG investing with approximately 61% of the total sustainable investment portfolio.¹² The report states climate action and affordable clean energy currently dominate the ESG investing space and remain as future focus areas.

To conclude, the institutional investors’ growing interest in ESG, investor awareness and the phenomenal track records of ESG investments are driving current and future ESG trends. The latest ESG trends, like the push for standardisation AI integration and data-based ESG analysis, the regulator’s investigation of businesses with greenwashing practices and the increased focus on climate solutions and energy transition, highlight the dynamic nature of the ESG investing market in future. As financial advisors and investors understand the urgency and magnitude of various ESG concerns and incorporate these values and sustainable practices into the investing portfolio, they can build a greener and better tomorrow for generations to come. 

Source

1. https://www.ussif.org/news/press-release/us-sif-trends-report-documents-sustainable-investment-assets
2. https://www.theglobaltreasurer.com/2024/09/05/carbon-capture-gets-boost-from-major-bank-of-america-investment/
3. https://earth.org/blackrock-quits-major-net-zero-alliance-ahead-of-trump-inauguration-as-number-of-wall-street-lenders-shying-away-from-sustainability-efforts-grows/
4. https://www.netzeroinvestor.net/news-and-views/blackrock-state-street-and-vanguard-between-a-rock-and-a-hard-place
5. https://www.morganstanley.com/ideas/sustainable-investing-on-the-rise
6. https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/MSInstituteforSustainableInvesting-SustainableSignals-Individuals-2024.pdf
7. https://ieefa.org/articles/esg-funds-continue-thrive-and-outperform-traditional-funds-across-equity-and-fixed-income
8. https://www.sec.gov/newsroom/press-releases/2024-31
9. https://kpmg.com/us/en/media/news/the-challenge-of-greenwashing-2024.html
10. https://www.reuters.com/markets/us/us-sec-charges-bny-mellon-investment-adviser-misstatements-over-esg-policies-2022-05-23/
11. https://www.esgtoday.com/sec-fines-deutsche-bank-subsidiary-dws-19-million-following-greenwashing-investigation/
12. https://www.ussif.org/research/trends-reports/us-sustainable-investing-trends-2024-2025-executive-summary