New research suggests that behavioural bias is keeping younger investors from the better outcomes of responsible investing – and drawing them towards the ‘rich-quick’ glitter of meme stocks and ‘finfluencers’. As markets threaten to close a window of opportunity on younger generations’ financial security, AML Head of Strategy Christian Barnes calls on investment firms to start showing EQ as well as IQ – before it’s too late.
Heart rules head. Rational arguments are always second to our unconscious, more instinctive response to things. We had to bear that in mind recently when analysing the results of the Investor Index 2021 – our latest joint study among UK investors and advisers1.
In the context of a pandemic, the internal conflicts between beliefs and behaviour can have more significant consequences for investing. The most telling of these conflicts, perhaps, is in ESG, or Responsible Investing as a whole.
According to KPMG2, 81% of millennials want to know more about ESG. So, it is unsurprising that interest in Responsible Investing is far greater among our younger and new investor sample than among the over-55s. But the 18-34s were also far more likely to prioritise their financial security over Responsible Investing considerations. So, whilst the young crave financial security – up to 10x more than over 55s – they’re not using Responsible Investing to get it.
Despite evidence to the contrary, when talk turns to action they just do not ‘trust’ it to deliver. Heart over head, maybe – sourced in ‘muscle memory’ which tells us, through experience, that what is good for us, for the planet or for society, will always come at a price – in financial or performance terms.
We can see an example in the Fairtrade Foundation relying on customers wanting to pay more to buy responsibly sourced goods. And it took a (very much younger) family friend to convince me recently to try an ethically produced washing liquid that bias had led me to dismiss in the 1990s as expensive and inferior (it’s excellent). As we emerge from the confines of the pandemic, can we really expect young people, who may otherwise espouse the merits of slow fashion, to resist the fresh thrill of spontaneously clicked, cheap new clothing? Most of us, if we’re honest, is full of contradictions between what we believe to be right and our behaviour in the moment.
And this makes persuading younger, newer investors to put their money where their hearts are – into Responsible Investing – difficult. There is ample evidence that performance is better3 and that it need not cost more than the ‘full fat’ equivalent. But that causal linkage will need reiterating creatively ad infinitum to overcome the behavioural biases stacked against it.
This same muscle memory is at play in superstitions and luck. We win at something occasionally and find ourselves driven to repeat it – backing a horse, buying a scratch card – no matter how often we lose. Some of us find ourselves recreating conditions that we associate with success i.e. lucky socks, taking a certain route to work etc.
For the increasingly unadvised young investor – relying more on friends, family, their bank and their own research for advice (rather than FAs), these biases of luck and superstition are also presenting barriers to their longer-term financial security. They make ‘investing’ in meme stocks, CFDs et al, just ‘gambling’ (as one victim recently described it4) – with no concept of the value underlying their investment. And one-minute ‘finfluencer’ tutorials on TikTok are only likely to reinforce that.
These behaviours are all symptomatic of combined phenomena – being young, being human and finding our way through the uncertainty and turbulence of a global pandemic. In time, surely, all will come right, right?
Other trends suggest that there may be less time than we thought.
The first is the almost pivotal shift in institutional investors’ attitudes towards ESG and sustainable investing. MSCI found that some $30tn was invested in sustainable assets in the five major global markets in 2020 – a 34% increase in just 2 years. Those in the previously climate-change-denying US now put climate change as the No.1 investment priority. And 90% of $200bn+ global institutional investors will be increasing ESG investments in response to Covid-195. Across asset classes, the trend is strengthening as ESG has moved squarely into the mainstream6. At face value, this should be encouraging others to take the plunge.
But it’s this very popularity among volume investors that is rapidly beginning to tip the balance. Some feel the ESG market is showing signs of reaching maturity, becoming a victim of its own success – with a warning that ESG investing does come at some cost to investors3.
However, for all that, Morningstar’s Kenneth Lamont adds that ESG funds “…may reasonably be expected to outperform the market over long periods.3”
So, the broad, long-term benefits of Responsible Investing are there for the taking. For now. But they’ll likely become less good value in pure investment terms in the not-too-distant future. With state provision likely to continue to recede and the Responsible Investing ‘value’ window closing, – the need to overcome behavioural biases amongst the young has arguably never been more in their interest.
1AML and the Nursery’s Investor Index 2021 research report is available for free download at https://investor-index.com
1April 2021, 1100 UK investors (with £10,000+ invested) and a range of advisers.
2KPMG 2019 – the numbers that are changing the world
3FT, “ESG outperformance looks set to end, study suggests” 6th July 2021
4The Guardian, “… how a generation of amateurs got hooked on high-risk trading” 19th June 2021
5MSCI Investment Insights 2021: Global Institutional Investor Survey
6Institutional Investor “How the World’s Largest Asset Managers Are Finally Taking ESG Seriously” 1st March 2021