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Buyers of sustainable funds really want to make a difference

Buyers of sustainable funds really want to make a difference

04-06-2020 | インタビュー
Why do investors buy sustainable funds and what are the consequences of their choices for asset prices? These are the topics we discussed with Paul Smeets, professor of philanthropy and sustainable finance at Maastricht University.
  • Yann Morell Y Alcover
    Yann
    Morell Y Alcover
    Investment Writer

Speed read

  • Risk & return are key but not the main driver in decision making
  • Lack of consensus on sustainability makes impact on prices hard to assess
  • People don’t invest sustainably often because they never thought about it

Paul Smeets

Professor of philanthropy and sustainable finance at Maastricht University

In a recent research paper, you argue that intrinsic social preferences are a key factor in determining the likelihood of an investor of holding sustainable equity funds. Could you explain what you mean by social preferences and why this finding is so important?

“When I talk about social preferences and sustainability, I always refer to the United Nations’ Sustainable Development Goals. These cover different aspects ranging from climate action, decent work conditions and economic growth to clean water and gender equality. So, for me that’s how I look at sustainability in general.”

“And what my co-author and I found1 is that the expectance of better fund performance or lower risk is not the main motivation for individual investors to buy sustainable funds. Really, it’s because they want to make a difference. They want to have positive impact on the environment, they want to have a positive impact in terms of human rights.”

“And these considerations seem to be by far the most important in the decision-making process. Meanwhile, in the industry, financial professionals tend to focus first on risk and return. Of course, risk and return are important, but what our study shows is that they are not the main driver for people to buy a sustainable fund.”

Risk and return are important, but our study shows they are not the main driver

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Another important aspect you point out is social signaling. Do you mean that holding a sustainable fund can be likened to some mark of social status?

“Think about it. A solar panel on your roof or a hybrid car: these things bring reputational benefits. Other people can see the panel on your roof or that you’re driving a hybrid car. The same applies to investment funds. We analyzed how much people talk about their investments and found that those who talk the most are more likely to buy sustainable funds, because they get reputational benefits from it.”

So, you mean that this signaling behavior that is common among large institutional investors, that can communicate abundantly around their sustainable investments, is also common among individual investors?

“Oh, absolutely. People always like to see themselves and to be seen by others as good individuals. Just look at all the names of important donors on university buildings in the US. And our research shows that this is also true concerning the holdings of individual investors. Individuals do not want to be seen as somebody who invests in weapons or tobacco.”

You also argue that financial motives play a relatively minor role in the decision to hold sustainable equity. And yet, you find that investors who expect lower returns from sustainable funds are less likely to hold them. This sounds somewhat contradictory.

“We found that when people expect lower returns, they are slightly less likely to buy sustainable funds. Yet we also found that the ‘pro-social’ nature of people – something we assessed in a small experiment that tested how much money individuals tend to share – turns out to be a much stronger predictor of the likelihood that people will invest in a sustainable fund than financial expectations. So, both aspects matter, but the social aspect is simply stronger than the financial one.”

In your conclusion, you also indicate that social preferences as well as social reputation motives may influence asset prices more as the proportion of socially responsible investors in the market continues to grow. What kind of influence are we talking about?

“Let me give a clear example. Today, many investors avoid cigarette makers and, as a result, the price of tobacco stocks has gone down. This explains why these stocks now perform better, because while stock prices are lower, the dividends have remained the same. I think this will happen more and more as the number of sustainable investors increases further.”

“In the case of tobacco, many institutional investors actually have similar exclusion policies. And we saw something similar with Saudi Aramco’s IPO. The Saudi government did not get the high issue price they wanted because many investors eventually thought, ‘Wait a minute. I don’t want to own a company that has a very poor record in terms of human rights and climate change.’”

Could it also be the other way around? In other words, that people are flocking into stocks that are considered to be more sustainable than average?

“In the short run, the more sustainable stocks could outperform as asset managers put more emphasis on sustainability and investors buy more sustainable stocks. This would drive up the price of the stocks and result in a higher return. So, there might be a temporary mispricing of sustainable stocks. Those that come to the party early could benefit from this, but those that arrive late might be at risk.”

“In the long run, however, if there is more demand for sustainable stocks, we could see lower returns. Investors would then have to buy sustainable stocks at a higher price. But these might also come with lower risk, as some empirical evidence shows that taking sustainability into account helps reduce risk. Remember Bank of England Governor Mark Carney’s famous warning about risks related to climate change for institutions?2

“Having said that, we have to bear in mind that there’s not enough consensus on what sustainability means and how it should be measured. This makes it hard to draw robust conclusions about its impact on asset prices. Take sustainability ratings, for example: some providers focus only on products, while others also consider production processes.”

One point you raise has to do with geographical differences. You argue that your results can be generalized to other countries, as they too seem to be driven by specific attitudes towards the environment or charitable donations. Yet the level of adoption of sustainable investing varies greatly from country to country. How do you explain this?

“True, the number of investors who hold sustainable funds is relatively large in the Netherlands. Yet, there is nothing special about the preferences of Dutch individuals compared to those of, say, Germans or Spaniards. The Dutch rank average. So, the differences you mention have more to do with supply issues. It’s not that in some countries clients don't care about contributing to a better world.”

The main reason why people don’t invest sustainably is simply because they have never thought about it

“Actually, the main reason why people don’t invest sustainably is simply because they have never thought about it. That is why the European Commission will soon make it mandatory for financial institutions to ask their clients about sustainability, just like they ask about risk tolerance. So, there’s a lot of potential for developing sustainable investments.”

1 Riedl, A. and Smeets, P., 2017, ‘Why Do Investors Hold Socially Responsible Mutual Funds?’, Journal of Finance.
2 Carney, M., 2015, ‘Breaking the tragedy of the horizon – climate change and financial stability’ Speech at Lloyd’s of London, London.

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加入協会: 一般社団法人 日本投資顧問業協会

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