Investing responsibly: What drives preferences for sustainability and do investors receive appropriate investments?

Investors increasingly want to hold portfolios reflecting their social and environmental values, and regulators in Europe now require financial advisors to consider their clients’ preferences for sustainability. Drawing on construal level theory, this paper examines the factors explaining the extent of retail investor demand for socially responsible investing. Using a psychometric questionnaire captured in a large database of real data arising from the interaction of financial advisors with their clients, we assess the impact of risk tolerance and capacity for loss on sustainability preferences as well as demographic factors. We employ regression analysis and logit models. By comparing clients’ strength of sustainability views with the ESG ratings of the funds they buy, for the first time we are able to identify the extent to which fund choices and sustainability preferences match. While investors with stronger desires for sustainability do hold more highly ESG-rated funds on average, the relationship is weaker than might have been expected. Perhaps surprisingly, a majority of clients for whom responsible investing is very important hold some unrated funds, while those for whom it is unimportant nonetheless hold highly ESG-rated funds in their portfolios. We therefore conclude that more focus on sustainability preferences is required when financial advisors make recommendations to their clients to ensure that retail investors get the portfolios they want.