Barclays' new tool can help providers identify unmet ESG investing needs.

Impact investing — putting money to work in social, environmental and other ventures — has become something of a buzzword in recent years, spurring the creation of carefully crafted investment vehicles that channel money into worthwhile avenues while offering investors competitive returns.

Despite the growth in both investor interest and product availability, Greg Davies, managing director and head of behavioral-quant finance at Barclays in London, believes there still isn’t as much money going into impact investing as there could and should be. More and more people, the millennial generation in particular, have social, environmental and governance (ESG) investment objectives, he says, and they’d like to put their money to work in areas that contribute to the greater good. But matching this desire with impact investing products, despite the increasing in the number of products available on the market today, is a challenge.

“The hypothesis we’re running with is that investing in general is such a complex and daunting decision even without involving social objectives and when human beings are faced with complex decisions, they put off those decisions until tomorrow or the next day or the next year,” Davies says.

Barclays research has shown that although many investors are keen to embrace impact investing, turning those intentions into a comprehensive investment strategy is harder to achieve. Tthat’s mainly because investors are ill-equipped to navigate this complex area with any degree of confidence, Davies says. They don’t have the tools they need to make balanced and informed investment decisions, and many feel unprepared or unable to realize their social and philanthropic ambitions.

“What happens, then, is that investors stick with what they’re familiar with and give their money away through the channels that they know, like charities,” Davies says.

Impact investing is somewhere between philanthropy and finance. People are building funds with ESG filters, but these are still quite broad and general, and they don’t really take into account the fact that investors have different goals and different social desires.

That’s where behavioral finance comes in. Davies and his team have developed a simple tool that allows financial advisors to help their clients become familiar with their impact and ESG investing goals. Barclays has a longstanding focus on behavioral finance (the team has been in existence for nearly 10 years) and was among the first firms to develop a financial assessment tool to help understand investors’ financial needs from an emotional perspective.

“We’re extending this framework to include social objectives,” Davies says.

The simple, 24-question questionnaire will allow financial advisors to discern how strongly their clients feel about different social objectives. It will allow advisors to help their clients move forward with their social and impact investing goals by matching those goals with the products that best meet their needs.

More importantly, the tool is designed so that investors can clearly articulate their impact investing goals and visions, Davies says. This in turn will help providers craft vehicles that are tailored to different investment goals. The impact investing industry is still relatively new, he says, and as advisors, clients and purveyors of products become more familiar with what people want, it will evolve in a more meaningful and targeted direction by creating products that allow people to funnel their money into niches they really care about.

Using a behavioral finance perspective will also help figure out how to match up people’s investment goals with their social goals.

“Some people are good about giving up liquidity for social good, but they’re not happy giving up returns, whereas other people may be happy giving up a certain percentage of returns but they don’t want to give up liquidity,” Davies says. “These are big differences, so if we can figure out up front what people want, we can construct better individual narratives.”

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