It has been established that to understand investment sustainability preferences advisers must properly engage with their clients where their views and the implications of choices can be discussed.
Like understanding attitudes to financial risk, sustainability concerns can be very complex and therefore a suitable framework is required for tailored conversations. Since launching our psychometric Investment Sustainability Preference Questionnaire (ISPQ) in 2021, we have witnessed a significant rise in questionnaire completions and, more importantly, discussions being held between advisers and clients.
Developing a psychometric questionnaire
Prior to the release of the ISPQ, the most widely used approach both to understand clients' views and for research purposes was to simply ask clients: 'How interested are you in sustainable investing?'.
However there are issues with this approach. Firstly, the term 'sustainable investing' can be interpreted differently by clients, and the consequences on clients and their portfolios are unclear.
Secondly, as there are many aspects to consider when making investment decisions and factors that can influence clients' views, then it is likely that using one question to stimulate a conversation or to make assumptions will lead to many areas being overlooked.
Thirdly, the personal view of the adviser can influence how such questions are posed, therefore advisers can bias responses and influence the level of depth that conversations can go.
Ultimately, this method is not a reliable or valid approach for understanding clients' sustainability preferences.
A more systematic, psychometric approach addresses five aspects important for understanding not only what influences views on sustainability, but what drives investors to act when it comes to the way they want to invest:
- how important it is that their values and beliefs are taken into consideration (personal values);
- the importance of their decisions benefiting others as well as themselves (psychological distance);
- how they would feel knowing they are having a positive or negative impact on the environment and society (emotional benefit);
- the extent in which they would like to ensure they have a positive impact (positive impact); and
- their willingness to reduce their investment opportunities considering these potential benefits for themselves, the wider society and the environment (financial considerations).
A psychometric approach is important for understanding sustainability preferences, but the development stage of a psychometric questionnaire has a significant impact on the robustness of the question set.
A well-designed psychometric questionnaire evolves from academic theory and research before testing begins, gathering data on a large array of items from a wide demographic.
Next steps involve analysing how those items cluster and work together to define multiple dimensions of the variables being measured, understanding which items are not relevant or are in fact redundant and how individual items impact and reflect the overall measure and result.
Views on sustainability
Our statistics, based on questionnaires being completed by more than 4,000 advised clients each month, show that from conception to the end of 2022, around 70 per cent of clients feel that sustainable investing is at least of some importance to them (see figure 1 below).
For 39 per cent of clients, while sustainability is not the most important thing, they would want some consideration of sustainability to be made within recommended solutions.
For these clients, solutions therefore do not necessarily need to be rated average amongst their peers when assessing the underlying holdings across a broad range of ESG criteria.