Sustainable investing leads trust levels to increase

Author: Will Goodhart

Published by Sustainable Investor

Trust is a valuable asset. For individuals to invest their money either for themselves or on behalf of an institution, they need to trust that their intended outcome will be achieved. The good news is that trust in finance is on the rise and sustainable investing is a key influence.

CFA Institute’s 2022 Investor Trust Study draws on the outcomes of surveys with 3,588 retail investors and 976 institutional investors across 15 leading global markets in October and November 2021. The results suggest that investors’ appreciation of financial services is improving. The proportion of institutional investors with high or very high trust in financial services has risen to 86% (65% in the prior survey from 2020). Among retail investors, trust levels are up to 60% (previously 46%). Financial advisers fare well in the survey ranking as the second most trusted sub-sector (just behind consumer banks) despite the fact that there are still significant gaps between what retail investors expect of their advisers and what they experience (particularly on disclosures on fees and conflicts of interest). Notably, trust is much higher for those with an adviser than those without (though both have seen increased levels of trust). 69% of retail investor respondents with an adviser trust financial services (up from 57% in 2020), while just 47% of those without an adviser share that trust (though this is also up – from 33%).

What’s clear is that the strong market performance experienced up until the end of last year has affected investors’ perceptions of the trustworthiness of financial services. Our clients are more trusting when we perform. Fee compression and technology that has allowed more personalisation and greater access to different product types have probably also played a role. That’s good news at a time when underperformance is likely to affect investors’ views of the sector’s value. Importantly and helpfully, an adviser’s ability to engage their clients on sustainable investing is also a clear contributor to trust.

Twice as many of those retail investors that already employ ESG strategies are advised rather than unadvised (13% versus 6%) and 39% of those that are advised are very interested in comparison to 30% of those that invest without advice. And of the combined total of 10% of retail investors that are already investing in ESG funds, twice as many either completely trust or trust financial services. The same is true for those that are very interested in ESG investing. There is a clear correlation between advice, ESG investing and trust even if our data can’t yet establish causation.

Retail investors across all markets are either interested in or already using ESG investing strategies (77%). ESG areas of interest vary among retail and institutional investors: climate change, clean energy, air and water pollution are the top concerns for retail investors, while data protection, sustainable supply chain management, and climate change are the top concerns for institutions. Among institutional investors, best-in-class screening (cited by 57%) has overtaken engagement and active ownership as the most popular approach to ESG investing, and institutional investors are showing high levels of trust in ESG messaging and net-zero pledges (87% trust such messaging). In contrast, less than half (46%) of retail investors trust these pledges, illustrating some concerns over potential greenwashing.

What’s also clear from the data is that retail investors are increasingly driven by the expectation that ESG investing will improve the performance of their portfolio rather than due to their values. The proportion of retail investors investing sustainably because they believe that doing so will improve their risk adjusted returns has increased from 29% to 31%  while those doing so to align with their personal values has dropped from 47% to 44% in the last two years. The number of those investing sustainably for both reasons has held steady at 24%.

It is important that we build investor trust if we are going to help them achieve their life goals – particularly at a time when the value of cash and bank deposits is being rapidly eroded by inflation. Smart advisers will continue to encourage clients to invest sustainably because of the positive feedback effects on trust.

Exhibits 39, 41, and 42 are all generated from questions first asked in 2022.  For trending data from exhibit 40, see below:

Looking at the relationship between interest in ESG and those with/without an adviser:

And the relationship between trust in financial services and interest in ESG investing, looking at both variables as dependent/independent:

Will Goodhart, Chief Executive, CFA UK