Behavioural finance fintech firm Oxford Risk warns that a mismatch between investor preferences and fund profiling could lead to investors not being matched to the most suitable investments.

Oxford Risk is urging wealth advisers to make better use of technology to provide improved services to clients based around understanding their needs through detailed profiling. Key problems it highlights include poor ESG labelling on funds which are becoming as ‘meaningless as the word natural on a food label’ and failing to record investors’ individual preferences which are often complex and contradictory.

It warns that a narrow focus on what can be measured could lead to products being developed not to help investors meet their social goals, but to game the measurement system.

While the ‘green rush’ sees on-going demand for ESG investment opportunities, investors want to be sure that ESG funds do what they claim to, and there is a demand for independent parties to verify those claims. Properly constructed ESG profiling provides a double bonus for wealth managers by increasing the amount investors put into ESG investments by up to four times and making investors with high ESG preferences much more likely to invest overall.

Advisers need to determine how much ESG the investor should have, and then how much the investor is prepared to balance greater impact against financial returns. Advisers then need to select investments based on investor preferences including considering their relative focus on environment vs. social vs. governance.

Greg B Davies, PhD, head of Behavioural Finance, Oxford Risk said: “As the ESG industry expands, so does recognition of its darker elements. There are signs of trouble ahead. And it’s likely to be unsuspecting and unsatisfied investors left picking up the tab. Investor demand for investments with some sort of socially conscious edge is obviously rising. But it is in asking: ‘what is it, exactly, that they want?’ that we start to see difficulties.”

 Oxford Risk uses behavioural tools to assess investor preferences and, supplemented with other behavioural information and demographics, builds a comprehensive investor profile. Its financial personality tests can measure up to 18 distinct dimensions, of which six reflect preferences for ESG investing.