ESG Investors are Different. The Industry Needs to Approach Them Differently
Personality tests and self-analysis have stood the test of time. From today’s Myers-Briggs indicators all the way back to the early Greeks, who explored approaches to psychometric measurements based on how our bodily ﬂuids, or “humors,” affected personal traits, personality has long been known as a powerful force in determining our behavior.
However, one area where this work has seen little progress is in investing.
The growth of ESG investing has further exposed the shortcomings of this approach.
Environmental, social and corporate governance-focused investors (ESG) bring a different set of expectations and goals to the market. They want to invest with broader socio-economic implications and tend to have a long-term outlook that indicates optimism and a desire to invest in the greater good. This is an inspiring signal for people, companies and institutions.
It’s not a small segment.
Positivly recently conducted a study of investor behavior and found that “Purpose” was the most important dimension for nearly 40% of investors and was one of the top two dimensions for 67% of all respondents. This trend toward social impact and issues-focused investing has been going on for some time, of course, but has accelerated during the COVID-19 pandemic with assets in ESG-focused funds topping $250 billion as of September 2020 and continuing to grow.
The most interesting aspect of this shift to both ESG and socially responsible investing (SRI) isn’t so much that it is happening, but how different these investors are from their more traditional peers. This is in part due to the fact that ESG and SRI mean different things to different investors.
The top ESG causes that investors identified in our study were all over the map, ranging from health and wellness efforts such as curing disease and anti-tobacco initiatives, to environmental concerns like clean water and climate change, to gender and social diversity, as well as eradicating poverty. We found that women prefer to invest in social causes while younger investors prefer to focus on broad, global impacts such as climate and poverty. Older ESG investors, on the other hand, tend to invest closer to home on issues that directly impact their lives like gun control. Ethnicity and income play a role as well -- equality and poverty are higher priority causes for younger and Black Americans, whereas gun violence and climate are higher priority for those with higher incomes.
All are ESG, but all are different. The one factor tying them all together is a shared interest in making the world a better place for all of us.
It makes sense, since ESG and SRI investing can be very personal, involving motivations and desires that often go well beyond the financial risk / reward calculations of traditional portfolio construction. My ESG is not necessarily the same as your ESG.
It’s like musical taste. We can all say that we’re music lovers, even if that means that I love rock, you love hip hop and someone else loves country. But those different segments don’t change the fact that we all love music as a whole.
In order to reach these new types of investors – who broadly represent the many different faces of ESG – the industry needs to move toward hyper personalization so that it can reach each investor with information and advice tailored to that individual’s interests and motivations. It needs to uncover the “patterns of one” that drive each investor’s decision-making and motivations.
That’s what we’re building at Positivly, combining the principles of positive psychology with modern wealth management in order to strengthen the connections between investors, their advisors, and their wealth.
This isn’t an easy step to take, but there is opportunity in this challenge. By considering the power of personality, the industry will be better equipped to understand and engage with clients more holistically. Advisors and wealth managers will form deeper connections with the people behind our accounts.
After all, we’re all people with our own hopes, desires and motivations. In order to better serve the investor of the future the industry needs to know not only what interests them, but why.
Dr. Vinay Nair is Chairman of THE TIFIN GROUP and Founder of Positivly, a personality-based marketplace for advice and investments.
THE TIFIN GROUP conceives and builds first-in-category fintech companies to shape the future of investor experience.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.