Sustainable investing has become all the rage. There has been a rapid rise in sustainable investment funds. There is, by now, also growing academic evidence that institutional investors increasingly prefer more sustainable firms in their investment portfolios. Surprisingly little, however, is known about retail investors’ sustainable preferences and asset allocation decisions. Do they care as much about the environmental and social impact of their investments and, most importantly, are they putting their money where their mouth is?
To study this Rik Lustermans, former master student Quantitative Finance at Erasmus School of Economics, and I obtained access to a proprietary dataset of investors’ investment holdings at ABN Amro private bank. This is the third largest private bank in Europe, with more than 100,000 clients and almost €200 billion in assets under management. The data consists of monthly individual asset-level investment holdings from March 2016 to October 2019.
The holdings are grouped by investor type, where we distinguish whether they have access to an advisor or whether they use the bank only for execution purposes, and by country of residence being the Netherlands, Germany, Belgium and France. As such, we know if individuals receive regular information about the sustainability ratings of their investment portfolio or not. which also varies between countries. While investors in the Netherlands and Belgium receive frequent updates of their investment assets’ sustainability ratings with their portfolio reports, sustainability reporting in Germany is less frequent, and no sustainability ratings are reported in France.
We otherwise incorporate that the bank changed the sustainability ratings provider during the time period that we assess, resulting in an increase in the number of client assets for which sustainability ratings are reported. As this increase is unrelated to the asset’s fundamentals or underlying sustainability characteristics, it allows us to measure investors’ response to the ratings themselves.
Significant investment flows towards more sustainable assets
We document that over the course of our sample period, these retail investors allocated more money to assets with a high sustainability rating and less money to assets with a low sustainability rating, compared to assets with a moderate sustainability rating.
The difference is economically significant, at 10% of the average monthly investment flow. In absolute terms, about €58 million per month in incremental investment flows into assets with high sustainability ratings, compared to those with low sustainability ratings.Over our entire sample period, this results in about €2.5 billion being incrementally allocated to assets with high sustainability ratings by the retail investors at this bank. We further find this difference in flows to be larger for equities than for bonds and to predominantly stem from allocation decisions of investors that receive advice.
When we treat the change in ratings provider as an experiment, we find significantly higher investment flows into assets with a high sustainability rating after this increase compared to those with a low sustainability rating.
‘Retail investors care about the planet: we document significant cumulative investment flows in financial assets with high sustainability scores’
We further examine whether investors reduce their exposure to assets that experience a ratings downgrade and increase their exposure to assets that are upgraded. We find that investors that receive more salient sustainability information (i.e. the advisory client group) react more strongly to these changes, by rebalancing their portfolios towards higher rated assets.
Retail investors care: they also allocate more towards sustainable assets
So do retail investors care about sustainability? According to our research, wealthy European private wealth investors do! We find that they invest significantly more in assets with high sustainability ratings than low sustainability ratings. Moreover, we show that they react to changes in sustainability ratings by rebalancing their portfolios towards higher-rated assets.
Our results suggest that sustainability ratings upgrades elicit significantly positive investment flows particularly by advisory clients and specifically by investors in countries that receive regular reporting of the ratings. That is, the sensitivity of investment flows to positive ratings changes is larger in countries in which sustainability ratings are more visible to investors.
Overall, our study provides systematic evidence that private wealth investors consider sustainability information in their investment decisions and make economically meaningful allocations towards assets with higher sustainability ratings.
It has two broader implications. Our findings show that when given more visible information about the sustainability characteristics of their investments, retail investors take those characteristics into account in their asset allocations. This has implications for policy that intends to redirect investments into more sustainable assets.
Our results also point to the influence sustainability ratings have on investment flows. It is therefore important for investors to understand what these ratings measure and how nuances of environmental, social and governance issues are summarised into one ratings number.
Mary Pieterse-Bloem is Professor of Financial Markets at Erasmus School of Economics and Head of Investment Office (CIO) at Rabobank since June 2021. Before joining Rabobank she worked for six years at ABN Amro private bank in the position of Global Head Fixed Income. Her main research interests are investor behaviour towards risk factors (liquidity, credit and ESG risks) in financial markets.
Rik Lustermans is Quantitative Analyst at Aegon Asset Management. He obtained his master’s degree in Quantitative Finance with distinction (summa cum laude) at Erasmus School of Economics in March 2020 and worked on this research as an intern at ABN Amro.