Ethical investing encourages consumers to invest more

Latest research shows ESG finance encourages investors to leave less in cash.

Investing with an environmental, social and governance (ESG) slant may make consumers richer, but finance industry jargon puts them off, research claims.

Behavioural finance company Oxford Risk warns that average investors are losing on out returns on cash they are not willing to invest because they don’t want to take on extra risk.

It claims savers could be earning between 4% and 5% a year if they were encouraged to invest this money according to their values with ESG investing, rather than leaving it in cash.

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A behavioural study by Oxford Risk found that 18% of UK investors are highly or extremely interested in responsible investing, and the corresponding figure for US retail investors is 39%.

But once they have tried responsible investing, the number highly or extremely interested in the UK increases to 37% and to 65% in the US.

Oxford Risk warns that a major barrier to progress remains the use of different terms and jargon for ESG and responsible investing, which includes sustainable investing, impact investing, social investing, ethical investing, low carbon investing and socially responsible investment.

Greg Davies, head of behavioural risk at Oxford Risk, says: “People are more willing to buy something for which there is a narrative that resonates with them.

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“If you can use ESG for that you are going to get people willing to deploy that cash to not only do good, but also become better investors.

“Our industry is tying itself in knots trying to use specific terminology and, frankly, the end investor does not care. This is the wrong way to communicate.”

Lisa Johnstone, a chartered financial planner for VWM Wealth, agrees that there is a growing interest in ESG investing. She says: “Interest in this area has really grown not least because the smaller companies and increased screening has fed down into outperformance.

“Investing in a world that clients would be happy to see their children living in will continue.

“It may be that in the long term, every company becomes ‘ethical’ as even the largest and slow-to-move corporates will need to embrace the theme and be accountable in the ESG space.”