Investing in Environment, Social and Corporate Governance (ESG) funds is becoming increasingly popular in the UK. More investors are considering the impact their money has on the planet and its people.
A new briefing note from behavioural finance experts Oxford Risk suggests that ESG can also help investors avoid missing out on returns.
The note suggests that ESG investing can help investors avoid missing out on returns of 4% to 5% each year on cash they don’t invest because they are not emotionally comfortable with the risks involved.
They warn that average investors miss out on returns on the cash balances they are unwilling to invest because of attitudes to risk. However, ESG investing can help address these concerns and ensure a higher long-term return.
During a recent webinar, Investing for Real People: Responsible Investor-Led Decision Making, Oxford Risk explained there is latent demand for investors who want to do good with their money.
By addressing this demand for ESG investing, advisers can support investment decisions by using behavioural finance tools, including the use of personality analysis.
Greg B Davies, PhD, Head of Behavioural Finance, Oxford Risk, said:
“The biggest behavioural cost to investing is usually not what people do when they are investing. It is the fact that large chunks of cash are left on the side because people are not emotionally comfortable moving out of cash and they surrender returns as a result.”
“However, people are more willing to buy something for which there is a narrative that resonates with them. If you can use ESG for that you are going to get people willing to deploy that cash to not only do good, but also become better investors.”
Global data shows that younger and wealthier investors are more likely to be interested in ESG investing.
A behavioural study carried out by Oxford Risk found that 18% of UK investors are highly or extremely interested in responsible investing. In the US, this figure rises to 39%.
However, once investors have tried responsible investing, the numbers rise to 37% in the UK and 65% in the US.
One significant hurdle investors face is the plethora of different terms and jargon involved with ESG and responsible investing. Terms include sustainable investing, impact investing, social investing, ethical investing, low carbon investing and SRI.
Greg B Davies commented:
“Our industry is tying itself in knots trying to use specific terminology and frankly the end investor does not care. This is the wrong way to communicate.”