The Untapped 29%: The Next Wave of Sustainable Investors
by Samantha Lamas, Behavioural Researcher
Sustainable investing continues to boast record growth and performance. But how can advisors reach and help investors who might be interested in sustainable investing but haven’t yet taken the plunge?
In our research, we began chipping away at this question by identifying how many investors may fit into what we’re calling the “do-should gap.” In other words, these are those who believe sustainable investing is important but do not invest in that way themselves.
Reaching the 29% in the Do-Should Gap
In our research, we asked 997 participants to state how important various factors were to them when they bought investment products. We then asked them how important they felt these issues should be in making investment decisions.
source: Morningstar analysts
After analySing the data, we found a considerable gap between how often people own sustainable investments and how highly people rate the importance of using sustainability information in investing.
Out of those who are not currently engaging in sustainable investing, 29% believe that company-level ESG policies should be a “fairly important” or “very important” factor when people select investments. These individuals are in the do-should gap–they believe ESG factors are important but have yet to incorporate them in their own investing decisions.
When we examined how people applied sustainable investing in their own behavior versus how it should be used by others, we again found a substantial gap. Twenty-six percent of respondents felt that a company’s ESG policies should be a more important factor than it was for their own investment-selection process.
What Drives Do-Should Gaps in Sustainable Investing?
When someone has a desire and opportunity to act but doesn’t do so, behavioural scientists refer to that as an “intention-action gap.”
These gaps can occur for myriad reasons. The person could have gotten distracted, forgotten to include these factors when making investing decisions, thought the process of including ESG factors seemed too difficult, or just procrastinated.
Nonetheless, this gap presents both a warning and an opportunity for advisors–a warning that an obstacle is stopping people from acting, and an opportunity to help people take action by removing the obstacle.
Closing the Do-Should Gap in Sustainable Investing
Our research finds that there are plenty more sustainable investors out there waiting to be brought into the fold. It’s just a matter of identifying them and removing whatever obstacle that’s keeping them from doing so.
Understanding if your client is interested in sustainable investing can come organically during one of your regular check-ins. But if it doesn’t, it may help to ask your client to complete an exercise similar to what we used in the study before or after you meet (see exhibit). Completing this exercise on their own may give them space and time to think about their answers more thoughtfully and give you better insights.
Because every client is different, there may not be a one-size-fits-all solution to closing the do-should gap in sustainable investing. However, research points to a few promising starting points based on a couple of common culprits:
1. For those who may be procrastinating:
Research finds that simply setting a time and date to get an action done helps individuals accomplish a task. Ask your client to schedule a meeting with themselves for when they will consider adding sustainable-investing aspects to their portfolio. Then, give them a due date. Let them know that during your next quarterly check-in, you will discuss sustainable-investing opportunities in more detail.
2. For those who may find sustainable investing confusing or difficult to implement:
The sustainable-investing landscape is still in its infancy compared with other types of investing. In many ways, there is still a lack of high-quality, consistent data–a concern that has recently gained prominence in the field. Help guide your clients to trusted resources to get them started when they are doing their own research into sustainable investing.
3. For those who may not know sustainable investing is an option for them:
Those of us in the finance industry may forget that sustainable investing is a foreign topic for many individual investors. There may be some investors who are passionate about adhering to sustainable habits in their everyday lives but don’t know there are sustainable-investing options open to them. For these clients, the intervention is simple: Present them with a few sustainable-investing options that can fit into their financial plan.
Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.
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