It can be easy to misjudge the importance clients place on returns alone, disregarding other influences affecting their investment choices, says Louis Williams, head of Psychology & Behavioural Insights, Dynamic Planner.
The level of demand for investments which actively consider environmental, societal and governance risks, as well as the level of regulatory disclosures, have grown significantly over recent years. Whilst this trend is expected to accelerate, there is still ongoing debate as to whether applying ESG criteria potentially delivers inferior or superior outcomes when compared to conventional investment solutions over the longer term.
However, as advisers aim to optimise their clients returns, many misjudge the importance clients place on returns alone, disregarding their specific preferences and interests.
In fact, investors are increasingly illustrating that they care about companies’ practices and their impact on the environment and society at large, with evidence from multiple sources highlighting how approximately 70-80 per cent of investors indicate that sustainability-oriented investments are of at least moderate interest/importance. During the development of our sustainability questionnaire similarly found that 78 per cent of a large cohort of investors expressed that consideration of sustainability within their investments was somewhat important.
Under the umbrella of sustainable investing there are potential utilitarian and hedonic benefits to consider: managing risks, financial opportunities, potential returns, as well as social, emotional, and self-expressive benefits. Therefore, useful discussions around ESG depend on having a clear understanding of the investor’s goals, values, and limitations.
Designing measures to understand sustainability preferences are necessary as advisors further consider investment suitability, but they must not simply gauge whether a client is either pro-sustainability or pro-returns. The potential personal, emotional, and social reasons behind investors sustainability preferences should be explored.
It can often be assumed that investors solely desire to maximise their wealth, however they can also be motivated to facilitate social change, resulting in wanting to seek investments that are consistent with their personal values. It is important to understand if investors would like to express their values and beliefs to others through the companies they invest in.
Such self-expressive benefits have a role in daily consumption, for example by purchasing environmentally friendly products in the supermarket we can implicitly convey our personal values and satisfy our social approval needs of being considered as an altruistic individual.
Similarly, when switching to the world of investing, these factors can provide psychological motivation for investors as they seek to achieve similar self-expressive benefits; being proud of the companies they invest in. In addition to such benefits, there are obviously more specific controversial and unsustainable areas investors may certainly want to avoid, and as always, discussion on such areas remains necessary.
As well as utilitarian and expressive benefits, it is essential to consider the emotional benefits of investing. Emotions are important when making financial decisions, whether integral to the task at hand or incidental and unrelated to the task.
More specifically, investors can benefit emotionally when acting responsibly through their investment decisions. In recent academic research, when more in-depth ESG information was provided to investors, an indication of emotional return, then greater preferences for ESG investments were recorded.
Interestingly, attempts to evoke positive emotions have been shown to be a potential avenue for encouraging sustainable investing. Recent experimental research found that by exposing participants to healthy scenes of nature rather than damaged scenes, where they were presented with images of what the environment could look like (positive) rather than what needs to be avoided (negative), then participants were more inclined to opt for sustainable funds, and more so by those classified to be highly proactive individuals; demonstrating how the emotional benefits of managing ESG risks influence sustainable investing decisions.
A proportion of investors are considered to be proactive; they take the initiative to create a better environment for themselves and express a desire to do good where their investments produce social and/or environmental benefits. This extends further than wanting a company to simply monitor or manage their risks. As such investors are socially motivated, they have goals that differ to neutral investors who are indifferent about the consequences of their investments. Some may solely want their investments to directly have a positive social and environmental impact, whereas others may want to promote change within the investment universe more generally and have a greater influence on how all investments are conducted.
There are a number of hedonic reasons why investors may opt for sustainable investments or merely want to begin considering such options. Therefore, when holding conversations around sustainability, whilst being transparent about the potential impact on returns and investment opportunities, we must aim to further understand more about clients’ personal values and beliefs, how they would feel knowing they have a positive or a negative impact on the environment and society through the companies they invest in, and if they would like asset managers to actively encourage companies to improve their practices.
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