A behavioural approach to investor sustainability and ESG preferences

The term ESG has become a ubiquitous acronym that, at its core, represents business that transcends mere financial gains and exists with the aim of improving environmental, social and/or corporate governance objectives. However, defining the parameters of these objectives and distinguishing genuine commitment from mere rebranding isn’t simple. Addressing this conundrum is paramount, and, as history has shown, regulatory shifts tend to follow where interest intersects with ambiguity.

 

ESG in regulatory focus

 

Set against the backdrop of mounting interest from investors and a profusion of opportunities for fund providers, sustainable investing occupies a pivotal position. A global study conducted by Oxford Risk and Standard Chartered Bank in 2021 revealed that more than 90 per cent of emerging affluent and high-net-worth individuals expressed a keen interest in sustainable investing. While interest is an initial step, translating it into suitable investments requires meticulous alignment between investor preferences, opportunities and risk suitability.

 

Amid these dynamics, regulatory changes are inevitable. European MiFID regulations, which were updated in 2023 with further guidance from the European Securities and Markets Authority (ESMA) encompass, among others, ESG-specific rules. From a pragmatic perspective, it’s highly plausible that corresponding changes will echo through the UK legislative framework, hopefully in a more investor-friendly fashion.

 

Sustainable investing is awash with enthusiasm from investors, and opportunities for fund providers to harness this enthusiasm. The convergence of these forces, however, does not automatically guarantee compatibility between investors and investments. The potential for misguided opportunities often begets regulatory safeguards against misalignment. Regulations frequently teeter on the precipice of becoming perfunctory checklists, which holds true for ESG compliance. Fortunately, aligning commercial viability with regulatory compliance need not be adversarial. Effective strategies for promoting ESG products not only resolve immediate concerns but also resonate with an individual’s identity. To craft compelling messages, acknowledging the diversity of investor preferences becomes imperative.

 

The challenge and opportunity of regulatory adherence

 

Adhering to regulations can be realistically approached in two ways: by adhering to the letter of the law, or the spirit in which it was created. Focusing on the spirit inherently satisfies the letter, but the opposite isn’t always true. A token gesture of compliance might involve an investor opting for ESG without genuine commitment, resulting in a nominal allocation to a recently rebranded fund. Although such an approach ticks regulatory boxes, it falls short of honouring the regulations’ intent and thus the spirit in which they were created.

 

ESG’s regulatory spirit revolves around assisting investors in aligning their investments with their social goals. It goes beyond checkbox exercises, emphasising individual client aspirations. This naturally necessitates profound comprehension of these social goals – a prerequisite for compelling ESG investments along with the whys and whats of an investor’s holdings, and how much. It is this that presents an abundance of opportunity to the financial services, not only in meeting the spirit of the law but also ensuring latent client demand for sustainable investing is met, engaging investors head-on and working with them to improve their financial outcomes, even if these don’t necessarily always mean growing existing wealth.

 

When financial advisers and wealth managers robustly and accurately integrate clients’ sustainability preferences into a broader suitability framework, investment professionals can align financial aspirations with societal objectives, fostering a resilient and compliant investment ecosystem. Leveraging a behavioural approach will ensure clients are better engaged with their investment portfolio for the right reasons, can increase assets under management for firms while meeting the spirit and the letter of the regulation, and even help investors stay the course during periods of market instability.

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Click here to find out more about how Oxford Risk’s suitability and sustainability assessment solutions are helping advisory firms across Europe meet their MiFID obligations, increase assets under management, and deliver unparalleled customer experience and engagement.

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by James Pereira-Stubbs, Chief Client Officer, Oxford Risk