Investors struggle to translate personal ESG intentions into investment portfolio choices
LONDON, NEW YORK, and SINGAPORE, Nov. 15, 2021 /PRNewswire/ -- A new report, ESG is Personal: 2021 Study of ESG Preferences and Advisory Practices, released by Capital Preferences, has revealed that despite rising demand for sustainable investing, investors are not confident that their current portfolios are aligned with their environmental, social and governance (ESG) values. Capital Preferences is a financial technology firm that applies behavioural economics and decision science to investor profiling, including risk and ESG preferences.
The study set out to examine the client side of ESG investing and establish investors' attitudes in the UK, the US and Singapore towards ESG investing, their true ESG preferences, the strengths and weaknesses of their existing financial adviser on the subject and what would constitute for them the ideal ESG investment experience. Investors' ESG preferences were shown to vary widely and be distributed right across the spectrum of available forms of sustainable investment.
For the majority of investors across all regions (55%) there was a mismatch between their ESG preferences and their actual portfolio allocation.
Bernard Del Rey, Co-founder and Group CEO, Capital Preferences, said, "Many investors intend to invest sustainably, but lack the specific knowledge of how to do so. The key for financial advisers is to equip themselves with enough knowledge and the right diagnostic tools to enable clear, confidence-building conversations that guide investors in accurately identifying their unique ESG preferences. We believe that the financial industry can use technology to transform investor profiling and help investors realise performance-driven ESG investing that is more closely aligned to their personal beliefs and preferences."
Capital Preferences created a sustainable investing simulator in which investors made a series of investment allocation decisions relating to five ESG themes (Empowerment, Climate Change, Basic Needs, Natural Capital and Ethical Behaviour) based on the United Nations' 17 Sustainable Development Goals.
Applying a decision science 'revealed preferences' methodology, investors' individual ESG preferences were derived mathematically, producing an ESG 'fingerprint' comprising an altruism score and theme-weighting score used to construct portfolios that include a tailored, utility maximising mix of ESG investments for each investor.
Financial advisers typically establish their clients' investment preferences and risk tolerance based on the results of dialogue and questionnaires - 'stated preferences' - methods that are highly prone to bias and noise. Advisers to four out of five investors surveyed still use such methods.
The study also found that:
- 65% of UK investors rated ESG factors as "Important" or "Very Important" in their investing decisions (Singapore 74%; US 65%)
- Only 25% of UK investors were confident that their current portfolio is fully aligned with their values, with 37% and 14% of US and Singaporean investors respectively saying the same
- 60% of UK investors did not know how much of their portfolio they wanted to invest in ESG funds, compared with 50% in the US and 62% in Singapore
- 66% of UK investors did not know how they wanted to prioritise the E, S and G pillars in their portfolio
Among investors who knew the percentage of their portfolio that was invested in ESG funds, the UK had the largest share of investors (47%) who have >40% invested in ESG funds, with 40% of US investors and 22% of Singaporean investors holding the same proportion.
The study also showed that many investors lack the confidence to put their ESG investment preferences into practice due to confusion over ESG terms and concepts, conflicting ratings, and a lack of guidance on how to identify the right investments in this sector. Despite their general interest in ESG investing, most UK investors said they did not understand ESG investment strategies such as negative screening (58%), ESG integration (51%), impact investing (51%) or active ownership (51%).
A more systematic approach to understanding investors' ESG preferences could be key to addressing these concerns. When advisers delivered a high-quality ESG experience, clients increased their investment and became strong advocates for their advisers, which led to referrals. The study found that the 1 in 6 investors who highly rated their ESG investment experience reported a 90% Net Promoter Score (NPS) as opposed to those with a weak experience reporting an NPS of -3%.
Notes to editors:
About the report: ESG is Personal: 2021 Study of ESG Preferences and Advisory Practice
The study conducted by Capital Preferences collected responses from 908 investors who invest with banks or financial advisers. Responses were collected in August 2021, using an online revealed preferences exercise, followed by a survey. Respondents were distributed between Singapore (301), the United Kingdom (303) and the United States (304).
Capital Preferences was the ESG Vertical winner of the Global Fast Track Pitching competition at Hong Kong Fintech Week 2021.
For more information, please visit www.capitalpreferences.com.
