A glimpse into the responsible investor mindset

Sustainable finance is an approach to investing that aims to achieve non-financial goals, like protecting the environment or eliminating social injustices, as well as providing a return.

As with charity or government spending, proponents argue that the effects are widely dispersed, and so the long-term benefits accrue to everyone, rather than simply the individual making the investment.

At the same time, the marketing of sustainable finance is now rife with the claim that it leads to higher financial returns than you'd get elsewhere, which sounds a lot less like charity. Here are some examples.

A study published this year provides some evidence of the motivations driving people towards "responsible investments" (h/t to Patrick Jahnke), which explains why marketing is evolving in this direction.

Academics at the NHH Norwegian School of Economics used Skandiabanken, a Norwegian online bank (now called Sbanken), to test investor behaviour. They sent an email newsletter with information about responsible investment funds that either emphasised the financial returns on offer, or emphasised the “opportunity to contribute to a just or sustainable society”.

The results showed that people with higher wealth were more responsive to financial arguments than moral ones. Prioritising returns is on the one hand what you’d expect from investors in general; at the same time, it’s not what you’d expect if participation in sustainable finance were driven by a charitable impulse.

The paper emphasises the difference between wealthy and non-wealthy respondents. But at no level did moral arguments prove significantly more persuasive than financial ones (it’s simply that there was no statistically significant effects at lower levels of wealth).

From the paper:

Wealthy investors who are subject to financial rather than moral arguments click 29% more frequently for more information, while the difference is not significant for less wealthy investors. Furthermore, wealthy investors who are subject to financial rather than moral arguments invest in green funds 18% more frequently. Again, the difference is not significant for less wealthy investors.

So, it’s no surprise that banks and asset managers emphasise financial benefits. As the paper says:

…when marketing RI products, banks that target wealthier investors would be wise to emphasise the financially beneficial aspects of such products rather than their socially and environmentally relevant characteristics.

The return effects are potentially self-fulfilling, if regulation or the tax system subsidises certain assets and penalises others. This also creates an opposite, if not equal, risk that legislation does not materialise, or moves in a different direction.

If investors are interested in financial over moral arguments, that raises the question of what happens to the ESG sector if, as the performance data rolls in, it turns out that achieving non-financial returns does actually come with a cost.

Related links:
I can see your (green) halo - FT Alphaville
A bet on looming legislation - FT Alphaville

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