Behavioural finance experts Oxford Risk are warning wealth managers they need to have a good understanding of their clients’ focus on ESG in relation to their investment portfolios, and that they can show a robust recording of this if required.
It says regulators and investors will increasingly place investment management firms under closer scrutiny to ensure they are not greenwashing, or misleading clients over the ESG credentials of funds and portfolios.
Greg B Davies, PhD, Head of Behavioural Finance, Oxford Risk said: “The current investigation into allegations of greenwashing by DWS Group is just one example of regulators investigating possible greenwashing, and we expect this trend to continue.
“Wealth managers need to ensure they have a good understanding of their clients’ preferences for ESG, as well as their overall risk profile and investment needs. They also need to be able to illustrate this work clearly if required.”
Oxford Risk’s ESG suitability framework for wealth managers focuses on precise psychometric measurement of how much ESG each investor should be encouraged to have in their portfolio, and how from far down the impact spectrum components should be selected.
It also examines instrument selection to drive suitable asset allocation and looks at ongoing investor management and the use of tailored behavioural messages to improve investing decisions.
Oxford Risk’s research shows most investors want the emotional comfort that ESG investments do what they claim to do from 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 can provide a double bonus for wealth managers by increasing the amount investors put in ESG investments by up to four times and making investors with high ESG preferences much more likely to invest overall.
Oxford Risk’s behavioural tools assess financial personality and preferences as well as changes in investors’ financial situations to 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 own 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.