“Trust, in some form, is at the centre of all financial transactions.”
– Enhancing Investors’ Trust, 2022 CFA Institute Investor Trust Study
A healthy financial ecosystem depends on several inextricably linked factors. Some, such as the free flow of capital, ideas, and talent, and the robustness of the legal and regulatory framework, are more tangible and easier to define. Others, such as trust, are more difficult to measure but no less important to the healthy functioning of the markets.
Trust is a complex topic because it is inherently subjective and personal. To fulfil a market’s primary function of efficient capital allocation, investors must be confident in the overall system, and trust their individual service providers.
Trust is especially important for the investment management industry, since client outcomes manifest only after a period of time. Without a full appreciation of what drives trust, industry leaders and investment practitioners risk undermining the value proposition they provide to their clients.
Most importantly, investors must trust the system to work for their financial benefit. They are also increasingly aware, however, of how environmental, social, and governance (ESG) factors influence their investments and are paying greater attention to how their investments affect nature and the wellbeing of others. Investors need to be able to trust their advisors to take such factors into consideration, so that their investments are safe from ESG risks and aligned with their own values.
A study in trust
CFA Institute has studied trust since 2013. The fifth report in our biennial series, published earlier this year, is based on a survey of 3,588 retail investors and 976 institutional asset owners – including pension funds, foundations and endowments with at least US$50 million of assets under management. The survey was conducted in October and November 2021 across 15 markets globally.
In the report we explore the importance of aligning values and building personal connections in maintaining and enhancing trust. Interestingly, we observe that the growth of ESG investing across the world has increased trust in the financial services industry, according to 78% of institutional asset owners. This insight and others gleaned from related questions provide a useful basis for investment firms in developing their product and service offering in this fast-growing area.
Institutional investors believe growth in ESG Investing has enhanced trust in the financial industry
What impact has the growth of ESG investing had on trust in the industry?
The survey asked investors about their primary motivation when considering investing in ESG strategies. For retail investors, it was to express personal values or invest in companies that have a positive environmental or social impact. Institutional asset owners were more focused on using ESG investing to achieve higher risk-adjusted returns. Increasingly, investors expect both outcomes. Indeed, many investments claim to do well by doing good, although the extent to which these claims can be corroborated varies. Greenwashing – insincere pledges related to net-zero goals or other ESG messages – carries the risk of damaging trust in the industry.
Investors’ motivation for ESG investment
The views of retail investors diverged at the market level. Of the six Asia Pacific markets that we surveyed, retail investors in Hong Kong SAR, mainland China, and India felt that getting higher risk-adjusted returns was more important than alignment with personal values.
This signals both opportunities and challenges for investment professionals. For investors who prioritize financial performance, investment products must deliver a compelling proposition with competitive risk-adjusted returns. For values-driven investors, products must clearly disclose how values-based objectives are being achieved, how impact is being measured, and what the consequences of failure are.
The survey results show that there is a noticeable difference between retail and institutional investors in terms of their areas of interest within the ESG space. For retail investors in Asia Pacific, climate change and carbon emissions are most important (at 48%), followed by clean energy (39%) and data protection and privacy (35%). For institutional investors, the most important issue was executive compensation (26%), followed by sustainable supply chain management (25%) and gender and diversity (25%). Notably, climate change and carbon emissions did not even make it to the top five.
Priority of issues vary between retail and institutional investors
Another interesting observation is the wide gap between the the top- and bottom-ranked priority issues for retail investors, with 48% of respondents highlighting climate change and carbon emissions as a priority while only 9% pointed to board practices – a difference of 38 percentage points. Institutional investors, who are on the whole more focused on governance issues, did not indicate such a large divergence in how much they prioritized these issues.
With ESG investment strategies now having fallen under intense scrutiny, the risks of greenwashing are considerable. However, the results of our survey suggest institutional asset owners (88%) have high confidence in the ESG messaging on investment products. Their confidence is worthy of note, given these organisations are likely to have developed significant expertise in evaluating ESG claims, and devoted considerable resources to it.
On the other hand, only just over half of retail investors in Asia Pacific say they are likely to trust ESG messages. Their scepticism reflects a lack of trust in product providers, creating an opportunity for the industry to educate investors, increasing their awareness of ESG issues and raising their confidence in firms’ ESG claims.
Priority of issues vary between retail and institutional investors
All in all, the increased trust in the financial industry stemming from investors’ growing focus on ESG is cause for optimism that capital will flow into positive new areas.
Admittedly, the survey was conducted at a time when the market was doing relatively well and confidence was high. While strong markets boost trust, the converse is also true: in challenging times, trust tends to waver, so the industry cannot be complacent. It needs to better understand clients’ interests and values, and their wider expectations for how their funds are invested.
By focusing on more than immediate outcomes to build this understanding and align with clients’ values, investment firms will become stronger in the long run and more worthy of their confidence.