Emotion is driving ESG investing

Alison Steed

Alison Steed

Investing is something where we would usually try to limit our emotional involvement in a bid to make a more calculated decision rather than one that allows our heart to rule our head.

When emotions bump into investment choices, the danger is we get spooked when markets fall and sell our holdings, turning a paper loss into a real loss because we let fear get the best of us.

Or conversely, when markets are flying, greed keeps us invested because it may still have further to go.

Of course, this is where a financial adviser comes in, helping prevent investors who might otherwise act on their emotions from making a bad decision, by steering the best course in a falling or fast-rising market.

However, recent comments from Morningstar’s director of behavioural science Sarah Newcomb suggest being too rigid in the application of logic and maths to investment decisions could be doing a disservice to investors. After all, how we choose to invest, when we invest and the result of our investing can all have a direct impact on our sense of wellbeing.

For example, one of the biggest financial decisions we will ever make is buying a property. We all know that financial sense should take precedence here given the size and length of the commitment, but often the choice of property bought will be made as much with the heart as the head.

But it does not stop there. More of us are now keen to invest according to our beliefs, and the resulting surge in the number of environmental, social and governance funds is proof that emotion is increasingly playing a part in our investment decisions.

Two decades ago, green or ethical investing would have been considered a fringe activity. But not only did almost half of ESG funds outperform their benchmark index last year according to data from Morningstar, it was also those ESG funds presenting lower risk to their investors that performed the best.

Now, let us be fair, 2020 was a far from ‘normal’ year in every sense, but this does prove that investing with a conscience can also help your wallet. Here, at least, there has been a distinct advantage in your emotion and investments being intertwined.

Having more time on our hands thanks to lockdowns and furlough during the pandemic has given us extra time to look at our investments, and to explore new and different ways to invest. Hargreaves Lansdown has seen 6m trades on its platform in the first four months of the year, up from 4m in the same period last year. The multi-asset platform eToro saw its trading volumes rise 233 per cent in the first quarter of this year compared with the same period last year. This suggests people are using shorter-term trading strategies.