Pride is a powerful force

By now we know that investors in sustainable equity funds are somewhat different from investors in traditional equity funds. For example, the sustainable funds with the highest ratings attracted inflows from investors at the height of the pandemic while conventional funds suffered heavy outflows. Investors in sustainable investments are also willing to pay more for these investment products even if they have somewhat lower returns. In short, the money invested in sustainable equities is stickier and more forgiving of short-term underperformance.

And that is a good thing, especially, if we think about saving for retirement and other long-term goals where one of the key problems for financial advisers is that their investors don’t always stick to their investment plans during the hard times of a recession or a bear market.

What sustainable investments provide investors is a form of expressive value as they call it in the literature. In plain English: Investors are proud to be invested in sustainable funds (or more so than in traditional funds) and can brag about their investments at the golf club.

I am normally not a fan of investments with bragging rights because most of the time these investments are often fashionable bubbly investments that don’t have particularly attractive long-term return prospects. Or they are outright fraudulent investments like the funds of Bernard Madoff. But as I said, I don’t think that sustainable investing is a fad or something that has necessarily lower returns than conventional equities.

And now, it seems I have come across another positive effect of sustainable investments. They seem to entice people to put more of their retirement nest egg into equities and thus create larger retirement nest eggs in the long run. A study of 913,000 French employees with investments in more than 6,500 pension funds showed that the introduction of sustainable funds as possible investments in pension funds in 2017 had some significant impact on the portfolios of the insured. On average across all employees, the equity allocation in their retirement savings rose from 12.1% to 14.2% a 17% relative increase. And lest you are surprised about the low level of equity allocations in French pension plans, welcome to the world outside the Anglo-Saxon equity investment culture. In countries like France, Germany, or Italy, these kinds of allocations are pretty normal.

But going back to the 2.1 percentage point increase in equity allocations, the study showed that this was almost entirely due to the increase in sustainable equity funds. The introduction of new traditional equity funds to a pension plan did not change the appetite for equities much, but when a sustainable option was introduced to the plan, the appetite for equity investments in the affected plans rose by 7.2%. And when you save for thirty to forty years in your pension plan, that makes a huge difference in the size of your nest egg.

Ironically, in the United States, the country of equity worship, the Department of Labor has introduced new rules that prevent pension plans from considering anything but financial criteria when selecting investment options. And while there are reasonable objections to some ESG investments as misleading and effectively greenwashed, the new rule may lead to worse outcomes for the insured because they simply don’t invest as much in these plans as they otherwise would.