The Strategic Case for ESG Investing: A Win-Win for Clients and Advisors

By Brandon Wester, CFA^® 

The last few years have seen a whipsaw of interest in ESG investing by investors, advisors, and asset managers alike. Five years ago, financial companies jumped in guns blazing, rolling out a myriad of ESG products, signing on to sustainability and DEI pledges, and jumping on the green bandwagon.   

However, for various reasons, not least because of political backlash, that initial enthusiasm has considerably waned. In some circles, ESG has become a dirty word along with DEI and climate change. As a result, a good number of advisors who had previously leaned into ESG have backed off. The question is whether this is good for business or not.

The general case for ESG is it can help reduce portfolio risks, have social benefits, and help clients align their money with their values. However, our research suggests that leaning into offering ESG solutions could create more practice resiliency and better client behavior.  

Deeper Client Engagement Through Values Alignment

Traditional wealth management centers on portfolio performance metrics: risk, return, alpha, and likelihood of success. While these numbers matter, they’re easily duplicated and put you in direct competition with most firms. They also lack emotional pull, which we know drives client decision-making. When clients connect with portfolios on a deeper level, unique to them, there can be benefits for both parties.

Consider shopping at your local grocer versus a national chain. Customers develop loyalty to their neighborhood store not because prices are lower but because they feel connected to the business, local options, and community. The same principle applies to investing. When clients see capital deployed in alignment with their principles, such as supporting renewable energy or local projects, their relationship with wealth transforms from transactional to meaningful.

This emotional connection has tangible benefits during market volatility. Vanguard Advisor’s Alpha® research demonstrates that behavioral coaching is one of the most significant ways advisors add value, contributing up to 200 basis points annually.¹ Advisors help clients avoid detrimental behaviors such as panic selling. When clients are connected to their portfolio’s mission, they may exhibit greater patience during market fluctuations. 

Behavioral finance research supports this. Studies show investors who care about return sources, not just magnitude, develop different risk relationships. A 2021 European Corporate Governance Institute study examined ESG investor behavior during COVID-19. ESG-screened mutual funds had fewer outflows than traditional funds, leading to greater resiliency and reduced panic selling.² The University of Bangor in England found ESG investors exhibit greater short-term stability. High ESG-scored stocks were less affected by the “Monday Effect,” where stocks continue their behavior from Friday, meaning they showed greater resilience to this volatility.³ This behavioral stability can translate into improved long-term risk-adjusted performance, as clients stay invested through market cycles rather than buying high and selling low.

Strategic Advantages for Wealth Advisory Practices

Enhanced Growth Through Referrals and Marketing

In today’s competitive landscape, differentiation matters. While many advisors offer similar products and services, those who can credibly speak to ESG integration have distinct advantages. About 85% of high-net-worth individuals express interest in sustainable investing.⁴ This demand creates natural marketing opportunities being served by very few as advisors—a bottleneck to the demand.

Clients who feel their advisor understands and supports their values can become powerful advocates. They refer friends, family, and colleagues who share similar concerns. These referrals tend to be of high quality, pre-qualified by shared values, and convert at higher rates than traditional marketing leads, we have found.

Superior Client Retention Through Deeper Relationships

Perhaps the most powerful benefit lies in client retention. Research on top-performing firms reveals that practices employing systematic approaches with clear philosophical foundations achieve nearly perfect retention rates, a remarkable achievement in a commoditized industry.

The Dimensional Global Advisory Study, in which Dimensional-partnered firms participate in a survey covering key practice data, provides a compelling case study. High-performing firms participating in the research report exceptional retention rates (98%+).⁵ This success stems not from superior market timing or stock-picking but from helping clients understand and believe in a coherent investment philosophy, which DFA (Dimensional Fund Advisors) provides for them through compelling storytelling and research.

Values-based investing operates similarly when clients understand their portfolios reflect both financial analysis and alignment with personal values. The practice becomes less replaceable. Clients commit to relationships built on shared values rather than chasing returns or fees.

This stickiness has profound implications. Acquiring new clients is estimated to cost five to 25 times more than retention. Long-term clients consolidate additional assets, deepen relationships through additional services, and provide stable revenue, allowing practices to invest in themselves.

Next-Gen Integration

Cerulli Associates estimates $124 trillion will transfer via inheritance through 2048, with over $60 trillion to millennials and Gen Z.⁶ This puts capital in the hands of investors with different values. Capgemini research shows 81% of next-gen high-net-worth individuals plan to switch from their parent’s firm within one to two years post-inheritance.⁷ This represents approximately $50 trillion in newly available assets. 

A 2025 Morgan Stanley Institute report found 99% of Gen Z and 97% of millennials are interested in sustainable investing, with roughly half of them already allocating to sustainable investments.⁸ Advisors fluent in values-based investing are in favorable positions to build relationships with the next generation, which is key for a firm’s growth and sustainability.

The Integration Challenge: Beyond Checkbox ESG

Successfully implementing values-based investing requires more than offering ESG funds. Clients want a horse in the race, which involves storytelling—and simple screening will not achieve this. Fund providers that engage companies and publish compelling reports provide material that drives real connections. Impact investing through private markets can take these benefits further.

Conclusion: A Durable Competitive Advantage

The wealth management industry stands at an inflection point. As capital transfers to generations that prioritize impact alongside returns, you don’t want to be left behind.

Values-based investing isn’t just good for clients’ consciences; it’s good for their financial behavior and potentially your practice. When clients connect deeply with investments, they make better behavioral decisions, stay invested through volatility, and remain loyal to advisors who help align their wealth with their values. Robust ESG programs represent a strategic opportunity that can enhance growth, improve retention, and build a durable competitive advantage in an increasingly commoditized marketplace.

Sources:

¹ Advisor’s alpha^® Advisor’s Alpha | Vanguard Advisors. (n.d.-a). https://advisors.vanguard.com/advisors-alpha 

² ​​Albuquerque, R. A., Koskinen, Y., & Santioni, R. (2023, January). European Corporate Governance Institute: Mutual Fund Trading and ESG Clientele During the COVID-19 Stock Market Crash. European Corporate Governance Institute. https://www.ecgi.global/sites/default/files/working_papers/documents/mutualfundtradingandesgclienteleecgi.pdf 

³ Guo, Q. (2025) Advances in Economics Management and Political Sciences, Monday Effect in ESG vs. Non-ESG Markets: A Behavioral Finance Perspective. ResearchGate. https://www.researchgate.net/publication/396995292_Monday_Effect_in_ESG_vs_Non-ESG_Markets_A_Behavioral_Finance_Perspective 

⁴ Janz, C., Rilke, R. M., & Yurtoglu, B. B. (2025, June). Does ESG information impact individual investors’ portfolio choices? ScienceDirect. https://www.sciencedirect.com/science/article/abs/pii/S016726812500126X

⁵ Hayes, E. (2024, December 6). Advisors are establishing their own networks to win clients, says DFA. Financial Advisor. https://www.fa-mag.com/news/advisors-establishing-their-own-networks-to-bring-in-clients-80585.html 

⁶ Unpacking the Great Wealth Transfer. Cerulli. (2025, October). https://s3.us-east-1.amazonaws.com/cerulli-website-assets/documents/White-Papers/2025/Cerulli-White-Paper_Unpacking-the-Great-Wealth-Transfer.pdf 

⁷ World Wealth Report 2025. Capgemini. (2025, June 4). https://www.capgemini.com/insights/research-library/world-wealth-report/

⁸ Sustainable Signals Individual Investors 2025. Morgan Stanley. (2025, April). https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/2025_Sustainable_Signals_Individual_Investors_2025_report.pdf

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Brandon Wester, CFA®, is the Chief Investment Officer of Longwave Financial, a bicoastal wealth management firm focused on sustainable investing. He holds dual undergraduate degrees in finance and entrepreneurship and a master of science in finance from the University of Portland.

Investments are subject to risk, including the loss of principal. Environmental, social, and governance (ESG) criteria are a set of non-financial principles and standards used to evaluate potential investments. The incorporation of ESG principles provides a qualitative assessment that can factor heavily into the security selection process. The investment’s socially responsible focus may limit the investment options available to the investor. Past performance is no guarantee of future results.

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