Wealthtechs risk losing investors on ESG suitability

By Puja Sharma

Tech is too often a blindfold when it should be a microscope. Wealth advisers risk failing investors on suitability by not using technology appropriately to measure ESG preferences and being caught up in the ‘green rush’, behavioural finance experts warn.

Oxford Risk, the behavioural finance FinTech serving wealth managers, robo-advisers, banks and pension providers, is urging wealth advisers to make better use of technology to provide improved services to clients based on understanding their needs through detailed profiling.

A report commissioned by the firm argues that tech should be used as a microscope to determine investors’ ESG preferences but too often is acting as a blindfold with the risk that investors are not being matched to the right investments for them. Key problems it highlights include poor ESG labelling on funds which are becoming as “meaningless as the word natural on a food label” and failing to record investors’ individual preferences which are often complex and contradictory.

The study also warns that a focus on what can be measured risks products being developed not to help investors meet their social goals, but to game the measurement system.

Greg B Davies, PhD, Head of Behavioural Finance, Oxford Risk, said: “As the ESG industry expands, so does the recognition of its darker elements. There are signs of trouble ahead and it’s likely to be unsuspecting and unsatisfied investors left picking up the tab. Investor demand for investments with some sort of socially conscious edge is rising. But it is in asking: ‘what is it, exactly, that they want?’ that we start to see difficulties.”

The research shows most investors want the emotional comfort that ESG investments do what they claim to do and seek independent parties they can trust to verify those claims. The onus is on wealth advisers to match suitable ESG solutions to individual preferences. However, properly constructed ESG profiling provides a double bonus for wealth managers by increasing the number of investors put in ESG investments by up to four times and making investors with high ESG preferences much more likely to invest overall.

Advisers need to determine how much ESG the investor should have, and then how much the investor is prepared to balance greater impact against financial returns. Advisers then need to select investments based on investor preferences including considering their relative focus on E vs. S vs. G.

Oxford Risk’s behavioural tools assess financial personality and preferences as well as changes in investors’ financial situations and, supplemented with other behavioural information and demographics, build a comprehensive profile. Oxford Risk’s financial personality tests can measure up to 18 distinct dimensions, of which six reflect preferences for ESG investing.

It believes the best investment solution for each investor needs to be anchored on stable and accurate measures of risk tolerance. Behavioural profiling then provides an opportunity for investors to learn about their attitudes, emotions, and biases, helping them prepare for the anxiety that is likely to arise. This should be used to help investors control their emotions, not define the suitable risk of the portfolio itself.