What drives retail portfolio exposure to ESG factors?

doi:10.1016/j.frl.2021.102470

Finance Research Letters

Volume 46, Part B, May 2022, 102470

https://doi.org/10.1016/j.frl.2021.102470 Get rights and content

Highlights

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Our paper highlights the impact of financial literacy and risk tolerance on retail stock portfolio exposure to ESG factors.
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Our findings confirm that retail ESG preferences are not fully resilient to stressful periods.
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Our results demonstrate that the three ESG factors are not homogeneous and should be considered separately.

Abstract

Using both survey and trading data from 9,286 retail investors for the 2005–2011 period, we highlight the impact of financial literacy and risk tolerance on retail stock portfolio exposure to environmental, social and corporate governance (ESG) factors. Our results also reveal that the three ESG factors are not homogeneous and should be considered separately. Lower exposure to ESG factors during the crisis period suggests that ESG investing is a luxury good for most investors.

Introduction

Retail investors have shown increasing interest in sustainable investing over the last decade. At the end of 2017, retail investors held 25% of the global socially responsible investment (SRI) portfolio, up from 11% in 2012 (GSIA, 2018).¹ Despite the growing importance of the retail segment in SRI, very little is known about how portfolio exposure to environmental, social, and corporate governance factors, i.e., ESG factors, differs across retail investors and over time. Better understanding the behavior of retail investors regarding ESG criteria becomes however crucial in a context where ESG considerations are put at the heart of the financial ecosystem and are reshaping regulatory frameworks and industry standards.² This paper fills the gap by examining stock holdings in a large set of retail trading accounts over the 2005–2011 period. Specifically, we investigate the time-varying exposure of retail stock portfolios to the three ESG factors while controlling for a large panel of sociodemographic and individual characteristics. Our historical perspective also allows us to identify the impact of the 2008 financial crisis on retail stock portfolio ESG scores.

Past and current research attempts to capture ESG preferences through fund inflows (Hartzmark and Sussman, 2019), market participation (Brière and Ramelli, 2021), reactions to ESG disclosures (Moss et al., 2020), field experiments and questionnaires (Ridel and Smeets, 2017, Rossi et al., 2019, Bauer et al., 2021, Heeb et al., 2021), and lab experiments (Cheng et al., 2015, Martin and Moser, 2016). Our contribution to this growing literature is threefold. First, we provide new insights into ESG preferences among retail investors. By controlling for both subjective financial literacy and subjective risk tolerance,³ our paper helps better sketch the profile of the retail investors most likely to hold stock portfolios with higher ESG scores. In particular, we add to the findings of Anderson and Robinson (2020) on the impact of financial literacy and provide empirical evidence of a significant negative relationship between subjective financial literacy and stock portfolio environmental and social scores. Second, by combining survey data with actual trading activity data, we are the first, to the best of our knowledge, to separately identify the determinants of each ESG factor within the same sample of retail investors. We find identical drivers of both the environmental and social components of retail ESG exposure, while some differences emerge for the governance factor. Third, recent research points to a reduced interest in environmental and social factors during the COVID-19 crisis (Döttling and Kim, 2021, Glossner et al., 2021). This suggests that retail investors might consider ESG investments a luxury good (Baumol and Oates, 1979). These results are based on indirect measures of ESG preferences (i.e., inferred from fund flows or trading volume) and are not controlled for individual investor characteristics. Thanks to our panel data analyses spanning a 7-year period that includes the 2008 financial crisis, we show that retail stock portfolio ESG scores significantly decreased during that crisis, even when controlling for a large panel of sociodemographic and individual characteristics. Our findings confirm that retail ESG preferences are time varying and not fully resilient to stressful periods. Put differently, we provide empirical support for the “luxury good” characterization of ESG investing.

The rest of the paper is organized as follows. Section 2 describes our data, our sample, and our approach to measuring stock portfolio ESG scores. We report our empirical analyses in Section 3. Section 4 concludes.

Section snippets

Retail trading accounts

Our primary data set comes from a large Belgian online brokerage firm and consists of the trading accounts of 9,826 retail investors.⁴ These unique data span approximately 10 years from January 2003 to March 2012 and therefore include the 2008 financial crisis. For the purpose of this study, we exclusively focus on common stock investments.

Empirical analyses

To identify the determinants of actual stock portfolio ESG scores, we estimate the following panel data regression model: $Y_{i, t} = α + β_{1} S D_{i} + β_{2} S I C_{i} + β_{3} T P T F_{i, t} + β_{4} M K T_{t} + ε_{i, t}$ wherein the dependent variable is one of the ESG scores of the stock portfolio of investor $i$ at the end of quarter $t$ .¹⁵ The explanatory variables are organized into four sets. To characterize investor $i$ , we include $S D_{i}$ as a set of

Conclusion

Using sociodemographic information, survey data and stock holdings over the period 2005–2011 for a large sample of retail investors, we provide novel evidence that both individual characteristics and actual behavior contribute to explaining exposure to ESG factors over time. Our results show that heterogeneity across investors (i.e., in terms of age, language, education, subjective financial literacy and risk tolerance, trading intensity, and wealth) truly matters for a better understanding of

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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^☆: The authors are grateful to the online brokerage house for providing the data. They thank the editor and an anonymous reviewer for helpful comments and suggestions. They also thank R. De Winne, M. Pulikova, P. Roger for useful suggestions and the European Savings Institute (Observatoire de l’Epargne Européenne, OEE) for its financial support. Any errors are the full responsibility of the authors.

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What drives retail portfolio exposure to ESG factors?☆

Highlights

Abstract

Introduction

Section snippets

Retail trading accounts

Empirical analyses

Conclusion

Declaration of Competing Interest

J. Bank. Financ.

Finance Res. Lett.

J. Empir. Financ.

Q. Rev. Econ. Finance

J. Financ. Econ.

J. Financ. Econ.

Finance Res. Lett.

J. Bank. Financ.

J. Account. Econ.

J. Bank. Financ.

J. Financ. Econ.

Stock market literacy, trust, and participation

Rev. Finance

Trading is hazardous to your wealth: The common stock investment performance of individual investors

J. Finance

Get real! individuals prefer more sustainable investments

Rev. Financ. Stud.

Economics, Environmental Policy, and Quality of Life

Abusing ETFs

Rev. Finance

Future of sustainability in investment management: from ideas to reality

The impact of strategic relevance and assurance of sustainability indicators on investors’ decisions

Auditing J. Pract. Theory

Socially responsible corporate customers

J. Financ. Econ.