According to experts in behavioral finance at Oxford Risk, the concept of Environmental, Social, and Governance (ESG) can prevent investors from achieving annual returns of 4% to 5% on cash that remains uninvested due to emotional discomfort with the associated risks or unfamiliarity with the investment landscape.
Greg B. Davies, PhD, the head of behavioral finance at Oxford Risk, explains that the most significant behavioral impediment to investing often lies not in the actions taken during the investment process, but rather in the decision to leave substantial cash reserves untouched. This reluctance stems from an emotional hesitance to transition from cash, ultimately resulting in lost returns.
Oxford Risk, a financial services firm specializing in software solutions for wealth managers and financial institutions, contends that part of this unease is rooted in the complex jargon surrounding ESG and responsible investing. Davies asserts, “Our industry is complicating matters by relying on specific terminology, while the average investor is mostly indifferent to these terms. This approach is misguided.”
Despite these challenges, there is a noteworthy interest among investors to align their portfolios with their social values. A behavioral study conducted by Oxford Risk found that 18% of UK investors express a high or extreme interest in responsible investing.
Behavioral finance offers valuable insights to address this demand and can assist advisors in discerning investors’ preferences regarding responsible investments through personality analysis and advanced technology. This was a key takeaway from a recent Oxford Risk webinar titled “Investing for Real People: Responsible Investor-Led Decision Making.”