Major study: two thirds of individuals choose sustainability investments given choice

One of the big questions in responsible investment is if given the choice would individual investors select funds with a clear ‘sustainability’ label?
It’s a multi trillion dollar poser, because that’s the approximate value of global personal fund investments. And the asset base is growing fast as we shift from a defined benefit, employer sponsored model to a defined contribution individualised retirement system. As I asked in a piece earlier this week: how do people choose who runs their money, and on what criteria? For such a valuable and important industry, we don’t know that much.
Is it the case that people say they care for animal well-being and then buy the cheapest meat in the supermarket; the so-called ‘hypothetical gap’ between what people say and what they actually do?
Rob Bauer, Professor of Finance (chair: Institutional Investments) at Maastricht University, School of Business and Economics in the Netherlands, has been carrying out interesting research for years. And as a former head of research and European equities manager at Dutch pension fund ABP, he knows what he’s talking about in institutional finance. With Paul Smeets, Associate Professor in Finance at Maastricht and Tobias Ruof, PhD student in behavioural finance, Bauer has produced a fascinating paper with the bullish title: “Get Real! Individuals Prefer More Sustainable Investments”
There’s no substitute for reading the paper attentively, and you can do that here: Link to paper
But to summarise it briefly, the academics conducted a large-scale survey of 3,256 members of the €18.7bn Dutch Retailhandel DB pension fund. In the experiment,the pension fund board gave its members a real vote on its future strategy between more or less sustainable investments. Importantly, it guaranteed that it would implement the voting outcome; thus reducing the ‘hypothetical gap’. Participants were told that ‘sustainable investments’ focus on both financial and societal returns based on investing according to a number of the United Nations Sustainable Development Goals (SDGs) via a corporate engagement strategy. The experiment had different treatments. Another group was given a hypothetical choice which was identical, but without consequences. Following a methodical test structure to iron out biases, financial beliefs, confusion, related cost/benefits, lack of information, and the ‘hypothetical gap’, the paper found that 66.7% of participants favoured investing their pension savings in a sustainable manner with the choice driven by clear social preferences. Interestingly, a minority of the respondents was in favour of excluding companies that produce alcohol (17.4%) and tobacco (44.2%). The paper broadly concludes that institutional investors would benefit from taking their clients’ social preferences seriously, with consequences for asset prices and the fulfillment of the SDGs. It asks: “While European investment managers elicit clients’ risk preferences, most of them ignore social preferences. This raises a simple question: Why the reluctance towards social preferences?” It’s an important question. I think that the investment house that works out how to incorporate the answer into its investment and marketing approach is on to a big thing in a multi trillion dollar retail investment market where it’s hard to tell one asset management brand from another.