Carleton Centre for Community Innovation Exploring factors that influence social retail investors: Evidence from Desjardins Fund Dominique Diouf, Tessa Hebb, and El Hadji WP 13-01 Exploring factors that influence social retail investors: Evidence from Desjardins Fund Dominique Diouf, Laval University, Quebec (QC), Canada Tessa Hebb, Carleton Centre for Community Innovation, Carleton University, Ottawa, Canada and El Hadji, University of Montreal, Montreal (QC), Canada Abstract Most studies on the choices, motivations and behavior of investors consist of a segmentation focused on socio-demographic characteristics such as age, income, education level etc. Such approaches seem to simplify, even mutilate, reality by aggregating data about observable variables and considering investors as homogeneous groups. These perspectives are often inspired by a scientific approach that consists of separating to better understand the observed phenomena. By considering individual as a «homo economicus», that is to say, a rational and autonomous individual who makes decisions motivated by material gains, these studies fail to recognize all the complexity that shapes human behavior. Even though more researchers attempt to explore other factors such as those related to psychological aspects or social values, it should be noted that they do not always take into account the multidimensional nature of the observed phenomena. This paper argues that to understand the behavior and choices of investors as regards SRI, we must consider social investors as complex individuals and also take into account the influence that the institution may exercise (thanks to the role of SRI advisors and the other strategies for promoting socially responsible investment). We must also adopt a more open approach by understanding the characteristics and behaviors of individual social investors in relation to those of conventional investors. Our research builds on the theory of complexity framework. According to this theory, the truth must be thought of as a system where there is inter-influence between the whole and the parts. In this perspective, the individual must not only be seen as rational and autonomous, but more as an individual aggregation of overlapping identities. Our research provides evidence from focus Desjardins Fund, with data gathered by Desjardins from online surveys. We subjected the data to bivariate and multivariate analysis. This qualitative methodology is complimented by a series of 10 semi-structured interviews with managers, analysts and advisors. The results show that while demographic characteristics still remain important in understanding the behavior and attitudes of social investors, it is their social values, environmental, social and governance (ESG) issues, financial return considerations and the role played by the institution that are significantly associated with socially responsible investment of the portfolio. Our research highlights the complexity surrounding the phenomenon of SRI and has several implications both in terms of theory and practice. Keywords: socially responsible investing, SRI, investor choice, investment advisors, ESG, Acknowledgements: We would like to thank Desjardins for their assistance in this research, particularly in providing data for analysis, interviews and expert advice. We would particularly want to thank Rosalie Vendette and Benjamin Commerie of Mouvement Desjardins and all the participants of the qualitative interviews for their assistance with the research. We would like to acknowledge the role of the Social Sciences and Humanities Research Council is assisting with the funding for this research. 2 | P a g e 1. INTRODUCTION 1.1- Contextualisation In recent years, SRI has been radically transformed from an activity carried out by a very small number of investment funds that specialize in retail business - with a negligible economic impact- to an investment philosophy embraced by an increasing proportion of institutional investors involving pension funds and insurance companies (Eurosif, 2003; Gribben and Faruk, 2004). In its latest study published in 2010, Eurosif argues that the global market of SRI can be estimated at around € 7, 6 trillion, of which Europe holds the largest share. SRI has continued to grow faster than the assets under management of conventional investments (Eurosif, 2010). During the most recent financial crisis, from 2007 to 2010, the total universe of professionally managed assets remained almost stable while SRI assets, as always (documented in the report of Eurosif), enjoyed healthy growth. Regarding the specific case of Canada, all assets invested according to social responsibility principles are estimated to $530.9 billion as of June 30, 2010 (SIO.2011). This amount represents 19.1% of assets under management in Canada in 2010, roughly the same share as in 2008 (SIO, 2011). The important role of information, the role of women investors in SRI and the idea that investors should not sacrifice performance are three main reasons that contribute to the growth of SRI, particularly in the US (Schueth, 2003). Beyond these three main reasons, contextual factors such as the demand from institutional investors, international initiatives, the pressures of media and NGOs as well as the role of individual investors are determining factors in the development of SRI (Eurosif, 2010). The idea that investors should not sacrifice performance results from a progressive erosion of an old design of socially responsible investing (Wood and Jones, 1995; Freeman, 1999) which is in the process of giving way to a new paradigm by which the financial materiality of ESG factors is demonstrated (Keefe, 2007). Socially responsible 3 | P a g e investing is increasingly seen as a performance factor, an engine of shareholder profit by managing the risks related to ESG (Hebb et al., 2012). With the development of the socially responsible investing market, the importance of values increases. It is increasingly apparent that the values have a significant impact on investment (Bauer and Smeets, 2010a). There is therefore need, beyond the performance of SRI, to know more about the psychology of investors in the context of socially responsible investment (Dunfee, 2003; Lewis, 2002). However, taking into account the social values and exploring other factors increase the complexity in the specific field of socially responsible investing where facts and beliefs seem to be combined (Statman, 2000). For the purpose of this paper, we define social or socially responsible investor as an individual who holds at least one SRI mutual funds that can be a mutual fund with a social orientation, focused on the environment, or a combination of both (Bauer and Smeets, 2010a). Thus, the question of why some individual investors choose SRI while others do not practice it (Glac, 2009) becomes crucial Our research seeks contribute to the understanding of the motives, choices and attitudes of social retail investors by exploring the multidimensional factors associated with socially responsible investment decisions. 1.2- Structuring research questions and objectives The objective of this research is to explore the factors associated with socially responsible investment decisions in order to better understand how they influence the choices of individual social investors and analyze theoretical and practical implications. It revolves around the following questions: - Are there distinguishing characteristics that are associated with those who choose SRI products? Can we find a common indicator for SRI choices? 4 | P a g e - What are the common demographic characteristics (age, gender, geography, profession, income, education, etc.)? - Are there common attitudinal (values-based) characteristics? - Is awareness of environmental, social, and governance issues a determining factor in decisions on SRI investment? - What are the expectations and both in terms of ESG values and financial returns? - What are the gaps and trade-off between the ethical and ESG issues and the financial return? - What is the role of advisor in SRI investment selection? - What theoretical and practical implications can be drawn from the results of this study? The answers to these questions require several types of analysis (univariate, bivariate, multivariate) applied to the segment of social investors as well as to the segments of conventional investors and of those who hold both types of investment. The ultimate objective is not only to compare the different segments of investors but also to grasp how different variables (socio-demographic, ESG issues, attitudes, trade-offs, role of the institution) influence, to varying degrees, the choice of social investors. 2. PROBLEMATIC 2.1. Focusing on four fundamental SRI issues Looking through the literature on socially responsible investment, we realize that it is often dominated1 by the debate about the performance of conventional funds versus SRI funds. Thus, most studies attempt to measure the phenomenon by observing its evolution in terms of performance and changes in market size. The results of these studies, however, lead to a kind of "dichotomy" (Girard et al., 2005). While some studies find that there is a positive association between social and financial performance (Russo and Fouts, 1997; Reppeto and Austin, 2000; Orlitzky, Schmidt and Rynes, 2003; Derwall, 1 It must be recognized number of studies, in recent years, explore other issues such as shareholder engagement or the motivations of social investors. 5 |