New experiment shows investors prepared to sacrifice returns to invest in sustainable funds

Participants were asked to chose which of each pair of funds they would rather invest their own money in.

Funds and Investment Trusts October 23, 2019 by Tom Bailey

When asked in surveys if they would be prepared to sacrifice returns for more socially or environmentally sound investments, many investors answer in the affirmative.

But with sustainability funds still a small (albeit growing) share of the market, it is easy to be sceptical of most answers in these types of surveys. However, according to a new piece of research, described as a “virtual investment experiment”, investors really do seem prepared to receive lower returns for more environmentally friendly investments.

Ethics has entered mainstream investment thinking

An experiment by the University of Cambridge Institute for Sustainability Leadership (CISL), in cooperation with the Investment Leaders Group (ILG), involved 2,000 Americans who were asked to make real-world investment choices.

Each participant was shown two different funds at time, alongside each fund factsheet and sustainability information. Participants were asked to chose which of each pair of funds they would rather invest their own money in.

To try and ensure the study showed how people behave when they are actually investing their own money, participants were (truthfully) told they would receive a $1,000 (£776) investment in one of the funds they have chosen.

The study found that the median investor would prefer a sustainable fund even if they have to sacrifice up to 2% to 3% a year in performance. In total, 75% of respondents showed preference to sustainable funds.

As might have been expected, the experiment found that those below the age of 35 were more likely to chose funds with higher sustainability scores.

Less experienced investors were also more likely to opt for sustainable funds at the expense of returns. In general, less experienced investors were prepared to give up 3% of annual returns, while more experienced investors were prepared to sacrifice only 1.5%.

More experienced investors, we can assume, would be more likely to understand how a small annual return of 3% can compound into significant lower returns over a greater period of time.

The experiment also revealed that people had a stronger preference for avoiding funds with a poor sustainability rating than choosing those with high-positive impact ratings.

Dr Jake Reynolds, executive director of sustainable economy, at CISL, said: “The study shows that people want more from their capital than returns. Given the right information they will avoid investments that harm people or the environment.

“In the real world, most savers are not provided with that information meaning they are unable to make positive choices. Given what we know about climate change, [the] destruction of nature and high levels of inequality - that needs to change.”


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