The rise of ESG investing among (wealthy) retail investors
ESG investing has moved from the fringes to the mainstream, particularly in Europe. And within Europe, Scandinavians are leading the way. Thanks to the high data quality of the Danish Tax Authorities, and thanks to the work of Steffen Andersen and his colleagues, we can now track the rise of ESG investments among Danish retail investors and better understand who invests sustainably.
Analysing the investment portfolios of the entire Danish population as submitted in their tax returns, the researchers found that retail investors have significantly increased their holdings of sustainable funds and green stocks in the ten years from 2011 to 2021. For example, the fraction of investors who hold socially responsible mutual funds increased from less than 0.4% in 2011 to 6.8% in 2021 and the fraction of retail investors with green stocks in their portfolios rose from 8.7% to 15.9%. Most of that increase happened in the last three years the study covered from 2019 to 2021 so we could see an even faster increase in the last couple of years. These numbers are not as high as the numbers we find among institutional investors, but they clearly show that retail investors are catching up. The chart below shows that the resulting average allocation of green stocks in retail portfolios rose from 2.4% in 2011 to 3.3% in 2021, while the average allocation to brown stocks remained roughly constant at 1.3%.
Portfolio weight of brown stocks (left) and green stocks (right) by financial wealth
Source: Andersen et al. (2023)
Note how the change depends heavily on the financial wealth of the investor. While investors with lower wealth have hardly changed their allocation to brown or green stocks, wealthier investors have seen a much more significant shift in allocation. For the 10% wealthiest investors, the allocation to brown stocks has dropped from 3.4% to 2.9% while the allocation to green stocks has increased from 1.2% to 3.0%.
From the data, it is hard to understand why wealthier investors invest more in green stocks. One explanation that the authors test is the ‘warm glow’ hypothesis. They can show that investors who give more to charity tend to also invest more in green stocks and less in brown stocks. This indicates that the values of the investors play a role and that investors get ‘utility’ out of green stocks that go beyond mere financial returns.
Another hypothesis that I have, but that isn’t tested in the study is that there is a link between investments in green stocks and education. We know that people with higher educational attainment tend to make more money and end up in higher deciles of wealth distribution. We also know that people with higher educational attainment tend to have higher financial literacy and that people with higher financial literacy tend to invest more in green stocks. So this relationship between wealth and green investments could be a reflection of educational attainment.
However, what seems clear is that once people have more money, they shift more of their allocation toward green stocks. The chart below shows that people who get a larger inheritance tend to see a larger increase in their allocation to green stocks. This does not necessarily contradict the education hypothesis since it is entirely possible that people with higher educational attainment come from wealthier households and thus get larger inheritances, but at least it indicates that sustainable investments are not yet a ‘must have’ investment. Rather, retail investors still treat it more like a nice to have or a luxury.
Allocation to green stocks after an inheritance
Source: Andersen et al. (2023)