Investors cautious in allocation to sustainable investments: study

Investors view ESG as important but are proceeding with caution when it comes to their portfolio asset allocations, a new TD Wealth study suggests.

The firm had a survey conducted of more than 1,500 affluent and younger, emerging-affluent Canadian investors to ascertain what they valued, how they wanted to support their sustainability priorities and how certain personality traits affected sustainable investment decisions.

The study found that 8% of respondents were currently investing in sustainable investment–related mandates and strategies. Of that group, 91% said sustainable investing (SI) was important to them. About six in 10 (62%) respondents overall said they intended to pursue SI in the next 12 months.

However, about half (51%) of current and future SI investors allocated less than 25% of their portfolios to sustainable investments or intended to do so. Only 17% said they would allocate more than 50% of their portfolios to sustainable investments.

“If nearly all SI investors say sustainable investing is important to them, why does their behaviour suggest otherwise?” the study asked.

It found a difference in terms of ESG issues that investors found important to them versus those they found important as an investment strategy.

For instance, privacy and data security was the top ESG-related issue (falling under governance) cited by respondents, with 74% having said it was “very important.” Despite this, “it was not an SI issue that investors would be willing to consider for their portfolios” if such an investment existed, the study stated.

After privacy and data security, other SI issues respondents found “very important” were responsible water management (70%), workplace and worker health and safety (69%), product safety and quality testing (67%) and human rights (also 67%).

While social issues made up three of those top five, environmental issues turned out to be the most important ones that investors considered for their actual investment strategies. Theses consisted of clean energy sources (60%); carbon and other greenhouse gas emissions (53%); biodiversity, land and water protection (46%); responsible water management (44%); and waste management (also 44%).

There are plausible explanations for the difference between what’s important to clients and what their actual investing practices are, the study said.

“One of the most logical [reasons] may be that what people feel doesn’t always translate into what people do,” it said. Behavioural science calls that the “say-do gap.”

Another possibility may be that investors who already incorporated environmentally focused mandates in their portfolios see those mandates as having a proven performance history compared with those focused on social issues, “which are just starting to gain in popularity,” the study said.

Yet another possible explanation is that the “status quo effect” could be at play; namely, those invested in environmental funds may already view themselves as sustainable investors and therefore see no need to diversify into other SI areas.

The study suggested that, to build the right SI strategy for clients, advisors need to ask them more than which SI issues are important to them.

“A thorough discovery process that includes exploration of the client’s goals and risk tolerance can help to focus potential sustainable investing recommendations to the client’s specific needs,” it said. “[J]ust because an issue is important to a client, it does not mean that they will want to make it part of their investing strategy.”

Maru Group conducted the online survey on behalf of TD Wealth between Oct. 22 and Nov. 9, 2021, in both English and in French, with geographic distribution across Canada.

The polling industry’s professional body, the Canadian Research Insights Council, says online surveys can’t be assigned a margin of error because they don’t randomly sample the population.