A Behavioural Insights Analysis of the Effects of Environmental, Social, and Governance Factor (ESG) Disclosure and Advertising by Investment Funds on Retail Investors

ESG refers to a collection of non-financial factors used to assess an organization or investment's practices and performance on various sustainability and ethical issues. Investors can consider ESG factors when investing, which can include identification of material risks, growth opportunities, and other normative goals.

Currently, there is no global standard definition of sustainable finance or ESG (including the issues that should fall under “E”, “S”, or “G”). The IFRS International Sustainability Standards Board’s (ISSB) publication on June 26, 2023:^[10] IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (together, the ISSB Standards), is important for the development of a global baseline for sustainability disclosure. However, IFRS S1 and S2 will not enter into effect in Canada until given effect, with or without modifications, by the Canadian Sustainability Board, and then action is taken by the Canadian Securities Administrators (CSA) to establish disclosure rules in Canada.

Despite the fact that a globally agreed taxonomy has not yet been achieved, ESG can be understood as:

• Environmental: Issues relating to the quality and functioning of the natural environment and natural systems. This includes, but are not limited to, climate change, biodiversity, air and water pollution and natural resource management.
• Social: Issues relating to the rights, well-being and interests of people and communities. This includes, but are not limited to, reconciliation with Indigenous Peoples, diversity and inclusion, data privacy and security, labour practices, supply chain management and human rights.
• Governance: Issues relating to the governance of underlying companies and other investee entities. This includes, but are not limited to, board structure and independence, business ethics, executive compensation, and shareholder rights.

When retail investors make decisions to invest in ESG products, their selection of a fund may be influenced by the presence of ESG ratings or an ESG-related name. Within the ESG ecosystem, there are many different organizations involved. ESG investing has been facilitated by several key groups including institutions and intermediaries that support the manufacturing of fund products for retail investors, which include:

• Companies (corporate issuers) develop and share ESG related information
• Rating agencies evaluate this information and process data
• Fund managers leverage this data to identify holdings for ESG investment funds
• Fund rating agencies assess the investment fund’s ESG characteristics

See Figure 1 for a visual depiction of the value chain.

Figure 1: Retail ESG investing value chain.

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Source: PwC Analysis

ESG information about corporate issuers is developed and dispersed differently from conventional financial information, and definitions and disclosure requirements are not yet standardized. There are gaps in data, regulation is still developing, and rating methodologies vary and may be opaque. This makes it challenging for retail investors to make investment decisions about such issuers based on ESG factors.

Investors who are interested in ESG investing may turn to funds with an ESG focus and rely on fund managers to evaluate the ESG information of individual companies.^[11] However, this may expose investors in investment funds to greenwashing risk. Greenwashing is defined by the CSA in the context of investment funds as disclosure or marketing by the fund that intentionally or inadvertently misleads investors about the ESG-related aspects of the fund.^[12]

Fund managers may also be subject to greenwashing themselves due to misleading corporate issuer disclosure, complexity in calculating emissions throughout a corporation’s value chain in the case of climate disclosure, as well as challenges associated with opacity and information inconsistency provided by ESG data and ratings providers. Note that greenwashing is not limited to environmental claims but can also include misleading claims about the socially responsible aspects of investment products.
 

There are several organizations that collate, aggregate, and analyze data to provide quantitative measures to review ESG performance of companies. However, there is no standardized measurement of ESG factors. In addition, we speculate that the numerous different ratings provided by a myriad of organizations likely further confuses retail investors. See Table 1 for an example of the ratings by different companies.

Table 1: Key differences in ESG definitions and approaches by ratings agencies.

Source: Bien, Iqbal, Li, Stecher, & Manger (2021). Comparing Environmental, Social, and Governance Ratings Across Stock Exchanges. Global Economic Policy Lab.

In 2021, International Organization of Securities Commissions (IOSCO) noted some of the sources of the challenges related to the measurement of ESG. ^[13] They found that:

• There is little clarity and alignment on definitions, including on what ratings or data products intend to measure.
• There is a lack of transparency about the methodologies underpinning these ratings or data products.
• There is an uneven coverage of products offered, with certain industries or geographical areas benefiting from more coverage than others.
• There may be concerns about the management of conflicts of interest where the ESG ratings and data products provider or an entity closely associated with the provider performs consulting services for companies that are the subject of these ESG ratings or data products.
• There is a lack of communication with companies that are the subject of ESG ratings or data products.

ESG ratings and the data produced by ESG ratings agencies can be one of several sources of information used by fund managers to develop ESG investment funds, which are then used in fund marketing. The ratings generally use an approach that assesses the sustainability-related financial risks and opportunities to the company (i.e., enterprise value), rather than measuring a company’s impact on the environment and/or society (i.e., impact value). This difference is evident when we consider voluntary ESG disclosure frameworks, where two distinct approaches exist for companies—enterprise and impact reporting (Figure 2).

Enterprise reporting focuses on financially material risks to the organization due to ESG factors. Impact reporting looks at the impact of the organization on ESG issues. For example, “water stress” is an issue often included in assessments of the “E” factor. In what might be counterintuitive and/or misleading for retail investors, water stress refers to whether communities have enough water for the factories to consistently operate, rather than the company's impact on the water supply of the communities where it operates.

Impact reporting is less established than enterprise reporting, and less aligned with conventional financial analysis (instead relying on hypothesis and non-traditional data sources). Therefore, impact reporting is less likely to be used for ESG ratings.

These different frameworks may be likely misunderstood by consumers of ESG data and ratings, as they may believe ESG data and ratings are based on impact-value when the data and ratings could reflect enterprise-value.

Figure 2: Illustration of the key reporting approaches and their interconnected nature

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Source: CDP, CDSB, GRI, IIR, and SASB (2020), Statement of Intent to Work Together Towards Comprehensive Corporate Reporting

ESG products may be built using financial, enterprise-value, and impact-value reporting, ESG ratings, and proprietary research. There is a spectrum of approaches from enterprise-value focused on one end to impact-value focused on the other, with many possible variances. The five approaches commonly used to build ESG products are ESG integration, exclusionary screen, inclusionary screen, impact, and active (see Table 2).

Table 2: Spectrum of ESG investment themes

Objective	Integration Themes	Description
Enterprise- value focused Image Impact- value focused	ESG Integration	Incorporates ESG data, alongside traditional financial analysis, into the securities election process.
	Exclusionary Screening	Exclusionary screens can often be categorized as either values-based or norms-based. Excludes, from the investment universe, companies, sectors, or countries involved in activities that do not align with the moral values of investors or with global standards.
	Inclusionary Screening	Tilts portfolio toward one of following: Best in class: companies outperforming peers in ESG measures. ESG momentum: companies improving ESG measures more quickly than peers. Thematic investing: companies solving specific ESG challenges (climate change, gender diversity, etc.). Tends not to leverage ESG ratings.[14]
	Impact	Targets a measurable positive social and/or environmental impact. Investments are generally project specific and tend not to leverage ESG ratings.
	Active (i.e., corporate engagement and stakeholder action)	Entails engaging with companies and voting company shares on a variety of ESG issues to initiate changes in behaviour or in company policies and practices.

Some ESG investment themes use enterprise-value reporting while others use impact-value reporting, and others use a combination of both. As a result, retail investors may face difficulty understanding from the five ESG investment themes whether the approach to measurement is enterprise-value reporting, impact-value reporting, or both. Consequently, retail investors may purchase funds misaligned with their ESG investing intentions. Advisors could also face similar challenges. A combination of investment themes being used by fund managers when designing funds could exacerbate this challenge.

Prior to investing in ESG investment funds, retail investors may be exposed to ESG marketing developed by fund managers. Fund managers use several vehicles to market products and provide information to retail investors, including:

1. Push marketing (direct-to-consumer advertising) and press releases
2. Product names and product labels
3. Websites and retail outreach channels: fund manager and product branding/ websites
4. Fund documentation: prospectus, Fund Facts, fund factsheets, annual reports

Push marketing (direct advertising) and press releases refer to digital advertising of brands or products and press release statements regarding a fund manager or their products. Push marketing and press releases seem to serve two purposes:

1. Engage with retail investors and promote a fund manager's brand as sustainably conscious and aware
2. Update potential investors on new perspectives, approaches, or products that are aligned with ESG objectives

Product names and labels are a primary point of information for retail investors engaging with products, and often signal the intention of the fund.^[15] Fund names may have the word “sustainable” or may align with a particular theme / objective such as “climate” or “women in leadership”. This is a message sent by fund managers and has been observed to influence investor behaviour.^[16] The inherent complexity of ESG information makes it challenging to test and validate claims made by fund managers. Therefore, even with the best intentions, ESG marketing claims stand the risk of being misleading.

Greenwashing can occur within the marketing of ESG investment funds. Greenwashing—defined by the CSA—occurs when a fund’s disclosure or marketing intentionally or inadvertently misleads investors about the ESG-related aspects of the fund.^[17] Greenwashing poses a risk to investors and to the fostering of fair and efficient markets.

Continuous disclosure reviews by the CSA identified several areas of ESG-related fund disclosure for which there is a need for improvement to provide greater clarity to investors about ESG.^[18] Observations from those reviews include:

1. Some funds lacked detailed disclosures in their investment strategies about the specific ESG factors considered by the fund, including failing to identify or explain the ESG factors, or disclose how the factors are evaluated.
2. Around two-thirds of the funds reviewed use negative screening as an investment strategy, but a small portion of those funds did not provide an explanation of the negative screening factors where they were not self-explanatory. A small number of the funds reviewed use multiple ESG strategies outside of negative screening but did not provide disclosure about how the various strategies work together, including the order in which they are applied during the investment selection process.
3. Slightly over a third of the funds held investments in industries that, according to their exclusionary investment strategies, should not have been permitted. In addition, a fifth of the funds had portfolio holdings that appeared to be inconsistent with the fund’s name, investment objectives or investment strategies.
4. Almost half of the funds disclosed ESG-specific risks in their prospectuses. More than half of the funds reviewed use proxy voting as part of their ESG strategies. However, more than half of those funds did not disclose their ESG-specific proxy voting policies and procedures in their prospectuses or Annual Information Forms (AIFs), as applicable.
5. About three-quarters of the funds reviewed did not report on the changes in the composition of their investment portfolios due to the ESG-related aspects of their investment objectives and investment strategies. In addition, the majority of the funds reviewed did not report on their progress or status with regard to meeting their ESG-related investment objectives.
6. Around one-third of the funds reviewed provided more detailed disclosure of their investment strategies in their sales communications than they did in their prospectuses. For several funds, there were discrepancies between their prospectuses and sales communications in the way that they described their investment strategies.

The CSA Staff Notice 81-334 also states that “the name and investment objectives of a fund should accurately reflect the extent to which the fund is focused on ESG, where applicable, including the particular aspect(s) of ESG that the fund is focused on.”^[19] In June 2024, new provisions were added to Canada’s Competition Act that explicitly target greenwashing, which require businesses to have testing or substantiation to support certain environmental claims.^[20]

There are five main types of marketing themes used by fund managers which may have associated misleading claims, whether intentionally or not, therefore leading to greenwashing (see Table 3).

Table 3: Taxonomy of ESG marketing themes and greenwashing risk

Investors’ beliefs and attitudes towards ESG can significantly influence their investment decisions. These beliefs may motivate investors to invest in ESG investment funds. ESG investors can be classified into two types—those who are financially-driven versus values-driven (Figure 3). An investor can be anywhere along the spectrum.

• Financially-driven investors participate in sustainable investing to protect their investment portfolio from potential risks and to identify opportunities for enhanced returns.
• Values-driven investors are motivated by social, political, economic, and/or environmental reform—and they are driven by the desire and willingness to affect change in the world.

Figure 3: Types of ESG investors

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Source: PwC Analysis

Given their differing values, these types of investors engage in different investing decisions. Retail investors with strong intrinsic motivations aligning with ESG issues may be more willing to accept a reduced rate of return (due to a combination of higher fees and poorer fund performance).^[21] This is evident in our experiment as well (discussed later in this report), where we observe that values-driven investors are more willing to accept higher MERs for funds with higher ESG ratings compared to their financially-driven counterparts.

When retail investors become aware of ESG investing, they may consider ESG investment funds. When investors begin their research on ESG investment products, they likely examine three forms of information: product naming, ESG ratings, and marketing materials. Product names can play a key role when examining ESG investments, as many retail investors may not spend significant effort in exploring and deliberating beyond product names.^[22] As such, fund naming may drive investment decisions as a cue for product contents.

ESG ratings are also used to examine ESG investment funds. Ratings provide investors with a simpler measurement of the product. In addition, fund manager marketing material is another key form of information for retail investors. These resources provide a substantial source of ESG information and can help to update retail investor beliefs and perceptions of ESG investing and products. Simultaneously, these marketing materials may expose retail investors to somewhat confusing and potentially misleading marketing, and subjects them to information asymmetry (as fund managers may be privy to some additional information).

Throughout their ESG investing experience, retail investors may encounter various behavioural barriers. Initially, they may be prone to the bandwagon effect,^[23] where simply seeing others invest in ESG encourages them to do the same. As their interest in ESG investing grows, they will likely start examining different ESG investment funds. However, they may face information overload^[24] due to the numerous ESG investment funds available, potentially leading to decision paralysis.

Even after narrowing down their options, some investors might experience effort aversion.^[25] When motivation is low, they tend to choose the path of least resistance, avoiding the deliberation required to comprehend complex ESG data. Instead, they might rely solely on ESG ratings to compare funds. This can also make them susceptible to the halo effect—where positive impressions about a fund’s rating extend to other attributes (i.e., good ratings are associated with good returns).^[26]

Another behavioural barrier tied to the emotional aspect of investing in ESG investment funds is the affect heuristic^[27]. This can cause investors to make decisions based on positive emotions towards a fund rather than on rational metrics, simply because it “feels good” to invest in ESG investment funds. We speculate that this tendency is more pronounced among values-driven investors compared to those focused on financial returns.

The minimization of these biases and heuristics can lead to better investing decisions. To better navigate investing in ESG investment funds, retail investors should:

• Determine the importance of financial and non-financial returns, the trade-offs they are willing to make, and clearly understand their motivations to invest.
• Recognize that information in this space is voluminous and can be of poor quality. Triangulate information and avoid relying on singular sources where possible.
• Recognize it is difficult to measure the impact of products and companies on ESG issues.
• Realize that marketing may look to capitalize on the desire to create an impact with their investments.
• Understand ESG information before using it to inform decisions. This is particularly relevant for ESG ratings, where ESG ratings differ and often represents risk rather than impact, and different rating scales of ESG could drive investment decisions.
• Be aware that advisors may be facing similar challenges to retail investors in dealing with inconsistent information and processing that information.

A combination of access to robust data and information standardization, along with a better understanding of the common heuristics and biases in investing, may improve ESG investing decisions. Financial advisors can often guide investors, who provide recommendations in accordance with their Know-Your-Product and Know-Your-Client obligations, which may include ESG considerations.^[28] In addition, rating agencies and fund managers have a significant role to play in providing more clarity and transparency with respect to the methodologies and objectives of the funds, and being careful to avoid marketing that may be confusing or misleading.

Financial advisors can play an important role in assisting retail investors, especially when investors consider their options regarding ESG investment funds. In fact, when advisors are involved, they can significantly impact the ESG investing experience by absorbing some of the effort associated with processing ESG information. Their financial literacy, and product knowledge (as reflected in the Know-Your-Product requirements) position them to support retail investors. However, advisors may face many of the same challenges associated with the complex public ESG information as individual retail investors (although they may face fewer financial barriers in accessing some information, such as ESG ratings). In some cases, the complexity and unfamiliarity of the ESG landscape may deter advisors from recommending ESG products.^[29] It is therefore recommended that advisors’ proficiency on ESG knowledge (i.e., information and/or ESG investment strategies) be supported and strengthened.^[30]
 

We conducted a scientifically rigorous experiment to help facilitate data-driven, evidence-based regulation. The objective of the experiment was to measure retail investors' intentions, values, and attitudes toward ESG to identify how they translate into retail investors’ decision-making. We examined the effects of specific fund attributes (including ESG related attributes) that are found in manufacturers’ key fact sheets, on investor behaviour. In addition, we examined the susceptibility of Canadian retail investors to the effects of “greenwashing.”

To examine retail investors’ attitudes, values, and intentions regarding ESG investment funds, we employed an experimental paradigm known as a discrete choice experiment (DCE). A DCE is a quantitative research method that is used to understand individual preferences by presenting them with sets of hypothetical choices. In our experiment, we asked participants to choose between two investment funds—with each choice having a total of 8 attributes displayed within a key fact sheet (See Table 4 for description of attributes).

Both choices include the same attributes, however, their levels (i.e., versions of the attributes) may differ, as they are randomly selected from a predetermined list. For example, while both choices will have a fund name, the names may be different, such as ESG Equity Fund or Sustainable Equity Fund. In our experiment, each attribute contains at least 2 levels. See Appendix A for details about levels.

We then randomly generated two new investment fund choices for participants and asked them to choose one of the two new investment funds. We did this 12 times in total for each participant. By examining participants’ choices, we can determine which attributes within an ESG investment fund drive the selection of ESG investment funds.

Table 4: The attributes included in our key fact sheet.

Each key fact sheet contained these 8 attributes (sometimes excluding the rating explanations). See Appendix B for an example of the two choices of the key fact sheets.

Choice sets may include a clear explanation of ESG ratings. Unlike other elements of our choice sets, this is not commonplace in the market. It can be considered an intervention, inspired by the observation made earlier in this report, that a lack of understanding around ESG ratings may adversely affect retail investor decision-making.

A total of 961 retail investors’ data were analyzed in the experiment.^[31] Recall that each participant was given a series of 12 choices between two fund fact sheets and asked to select which of the two funds they preferred. In total, participants made 11,532 choices—each time selecting between two funds. Following the DCE, participants answered questions to assess their attitudes toward investing and financial product ownership. Finally, they filled out a demographic questionnaire.

A choice-based conjoint analysis—an analysis commonly used for DCEs—was used to analyze the results. This approach analyzes how much influence a particular level (e.g., a medium-to-low risk profile) has on the probability of an option being chosen. It also provides a comparable and quantitative metric that allows for the comparison of all levels within an experiment. A machine learning algorithm called _­K-modes clustering was then used_­ to group investors that shared similar attitudes and values. This allowed us to explore whether differences in attitudes toward the relationship between sustainability and financial markets would result in measurable differences in behaviour.

Attribute and Level Importance

Level Importance

The levels (i.e., versions) included in our DCE are presented in Figure 4, ordered by absolute level of influence in fund selection, and categorized by attribute. Each bar represents the relative contribution of each level toward choice. The greater the value, the greater the influence. Positive values indicate that inclusion of a level within a fund increases the probability of that fund being chosen, while a negative value indicates that its inclusion makes a fund less likely to be chosen. It is important to note that a conjoint analysis is not a zero-sum calculation, as every element could be positively predictive of choice, however, to varying degrees.

Figure 4. Influence of Levels by Attribute

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Outputs of the conjoint analysis indicating the relative contribution of each level within the experiment towards the probability of a fund being chosen, error bars indicate 95% Confidence Intervals.

Fund Name

There were no statistically significant differences in the selection of the four fund names contained within the experiment. While there was not a statistically significant effect of fund names in the experiment, it is possible that in another context such as an advertisement or marketing materials, fund names may influence retail investors.

Fund Investment Objectives

Fund investment objectives focused on either a) maximizing financial returns or b) driving positive social impact outperform the objective of reducing ESG-related risk. Two types of investment strategies were selected significantly more often than ESG integration alone:

1. A strategy that included prioritizing stocks that trade below intrinsic value (No ESG Strategy).
2. A strategy that coupled ESG integration with the inclusion and exclusion of certain companies (Integration and Screening). The Integration and Screening strategy is commonly used among ESG assets that are available for purchase.

Ratings

Our experiment analyzed ESG ratings along two dimensions: the strength of the rating, and the format in which ratings were communicated. The rating system used in the experiment is similar, but not identical, to what is prevalent in the market (an image representation and letters were used but not in the same manner).​​ The strength of a given rating was used to determine the difference between one rating’s contribution toward choice relative to the other rating’s contribution toward choice.

Within rating formats, retail investors favoured funds that contain stronger ESG ratings, with:

• A 4-star rating performing 7% better than a 3 star.
• A B rating performing 8% better than a C rating.

Across formats, retail investors favoured funds with star-based ratings over letter grades, with:

• A 4-star rating (2^nd best of 5-star range) performing 3% better than a B rating (2^nd best letter grade).
• A 3-star rating (3^rd best of 5-star range) performing 3% better than a C rating (3^rd best letter grade).

Interestingly, we also see that the absence of an ESG rating was preferred to an ESG rating of either 3 stars or C, suggesting that there is a threshold at which ESG ratings transition from a motivating factor to a deterrent.

Rating Explanation

Given our interest in whether retail investor decision-making is impacted by a misunderstanding of ESG’s intended function, a plain-language explanation was included as a possible feature on the key fact sheets. To our knowledge, this is the only feature in our experiment that does not reflect common practice in the market.

We might expect that confusion around ESG ratings could result in values-driven investors opting to purchase ESG products, under the incorrect assumption that they are associated with positive ESG impact. If this were indeed the case, the inclusion of a clear explanation would reduce the frequency of a fund’s selection. Contrary to our hypothesis, it was found that the inclusion of an explanation was positively predictive of choice, as choice sets containing a clear explanation was selected significantly more often than choice sets lacking an explanation. A possible interpretation of this finding is that participants simply found having additional information about the fund (regardless of what kind of information) to be more compelling.

Risk Profile, Past Performance, and MER

Three attributes that did not have direct ties to ESG were also included: risk profile, past performance, and MER. All three attributes contained levels that were strongly predictive of a particular fund being chosen. Past performance was especially significant, containing the single strongest-performing level across all attributes.

Retail investors preferred lower risk, stronger past performance, and low MERs, all of which are indicative of efficient investment and administration of a fund. This indicates the reliability of the results: while preference for various ESG or non-ESG elements is subjective, in the context of these three elements, participant behaviour was in alignment with what would be expected from investors trying to optimize fund performance. However, retail investors may have incorrectly assumed that past performance is a good predictor of future returns.

Attribute Importance

The relative importance of attributes by examining the difference in utility between the best- and worst-performing levels was calculated (see Figure 5). In the experiment, past performance had the highest degree of within-attribute variability: funds with strong past performance were much more likely to be chosen, while funds with poor past performance were much less likely to be chosen. Past performance was the most important attribute in the context of the experiment.

Of note, ESG rating stands apart as the second most important attribute, driven by the meaningful disparity between star and letter ratings. In other words, retail investors’ preference for star-based ratings over letter ratings was so strong that this attribute ended up being more influential than any of the more “traditional” fund attributes assessed, except for past performance. At the other end of the spectrum, fund name and investment strategy are relatively unimportant for Canadian retail investors.

Figure 5. Fund Attribute Importance

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Attitudinal data illustrating the relative importnace retail investors place on fact sheet attributes in investment decisions.

Profiling Canadian Retail Investors

Retail investors’ responses to nine questions about investing attitudes and values were used for segmentation. There were two distinct segments within the sample:

1. Values-driven investors (492 respondents; 51%) were characterized by a stated willingness to trade returns for sustainable outcomes.
2. Financially-driven investors (469 respondents; 49%) were characterized by a focus on more traditional outcomes such as return-on-investment (ROI).

The two segments were compared in terms of fund selection within the DCE (see Figure 6). Both segments were similar in their demographics and in their assessment of fund name, past performance, fund objective, and risk profile. However, there were several key differences. Of note, values-driven investors were less responsive to ESG integration strategies than their financially-driven counterparts. Financially-driven investors, in practice, displayed indistinguishable responses to all three of the strategies outlined as part of our DCE, while values-driven investors were less influenced by ESG integration strategies. Also, values-driven investors were more responsive to an ESG rating of 4 stars, relative to their more enterprise-minded peers. Similarly, values-driven investors were comparatively less likely to select a fund that lacks an ESG rating altogether.

The choices of values-driven investors did not appear to significantly differ depending on whether key fact sheets contained a rating explanation. Financially-driven investors, however, were more likely to select a fund with an ESG rating if that rating was coupled with a clear explanation. One potential explanation for this finding is that financially-driven investors found the ESG rating and/or the fund more valuable after understanding the meaning of the ESG rating.

When we look at MER, we can see willingness to engage in a trade-off between returns and ESG impact. Values-driven investors were comparatively less likely to select a fund with a low MER, and more likely to select a fund with a high MER. This suggests that values-driven retail investors may be willing to make some financial sacrifice in exchange for a more sustainable portfolio or they may hold an erroneous belief that ESG investment funds require higher MERs.

Figure 6. Influence of Levels by Segment

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Attitudinal data indicating the relative importance of each individual fact sheet attribute to retail investors as segmented by retail investor type.

Differences between the profiles are perhaps better understood when framed around attribute importance (see Figure 7). MER, as an attribute, was considerably more important for financially-driven investors, consistent with their preference for low MERs and aversion to high MERs relative to values-driven investors. Values-driven investors were comparatively more influenced by investment strategy. However, as discussed above, this was not driven by any impact-oriented fund strategies, but instead a relative aversion to ESG integration strategies.

Figure 7. Attribute Importance by Segment

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Attitudinal data indicating the relative importance of each individual fact sheet attribute to retail investors as segmented by retail investor type.

Susceptibility to Greenwashing

In the DCE, there are several iterations of key fact sheets that could be construed as greenwashing, as there can be iterations that have mismatches between attributes, such as mismatches between fund names (e.g., “ESG” Fund) and investment strategies (e.g., no ESG strategy). Another example is a mismatch between Fund names (e.g., “ESG” Fund) and Fund Objectives (e.g., Maximized Returns). The randomization of the DCE approach allows for some key fact sheets to contain greenwashing, which permits us to observe the greenwashing effect on retail investors. Based on the analysis of retail investors’ choices, retail investors were not sensitive to these mismatches in the attributes, as these mismatches did not influence their selection of the funds (even though they should be selecting these “greenwashed” funds less frequently). This suggests that Canadian retail investors may face risk from greenwashing of products available in the market.

In addition, when there is no ESG rating, funds that contain the term “sustainable” were 14% less likely to be chosen by participants compared to the other fund option. However, this effect was not found for fund names that contain “ESG” and “SRI” (socially responsible investing). The lack of any discounting (i.e., reduction in the frequency of fund selection) for “ESG” or “SRI” could be interpreted as participants’ susceptibility to greenwashing, as participants may believe that having “ESG” or “SRI” terms in the fund names mean that the fund contains ESG-related assets.

Key Findings

• The ESG rating stood out as one of the most important attributes influencing consumer choice—second only to a fund’s past performance.
• The strength and format of the rating (letter grade and number of stars) were both impactful attributes.
• Higher ESG ratings had more positive influence on fund selection than lower ESG ratings.
  • Star-rated funds had more positive influence on fund selection than letter-rated funds.
  • The absence of an ESG rating was preferred to an ESG rating of either 3 stars or C, suggesting that there is a threshold at which ESG ratings transition from a motivating factor to a deterrent.
• Cluster analysis revealed two distinct segments of Canadian retail investors:
  • Both segments were similar in their demographics and in their assessment of fund name, past performance, fund objective, and risk profile. They differed in their valuations of fund investment strategies, ESG ratings, rating explanations, and MER.

• Retail investors were not sensitive to mismatches in the attributes, such as a mismatch between a fund name (e.g., “ESG”) and its investment strategy (e.g., No ESG Strategy), as these mismatches did not influence their selection of the funds. This suggests that retail investors may face risk from greenwashing of products available in the market.

Attributes and Levels

Attribute	Label	Level
Fund Name	XYZ Sustainable Equity Fund	XYZ Sustainable Equity Fund
	XYZ ESG Equity Fund	XYZ ESG Equity Fund
	XYZ SRI Equity Fund	XYZ SRI Equity Fund
	XYZ Equity Fund	XYZ Equity Fund
Investment Strategy	ESG Integration	This fund’s investment selection process incorporates ESG data of the underlying issuers, namely the analysis of environmental, social, and governance factors alongside traditional financial analysis.
	No ESG strategy	This fund aims to increase the value of your investment by investing in a broad range of equity securities. Equities are selected securities/shares/stocks that trade below their intrinsic value, demonstrate superior earnings growth, and show positive price momentum.
	Integration & Screening	This fund uses general ESG integration, positive screening, and exclusionary screening by industry. Any industries involved in activities that do not align with the environmental, social, and/or governance values are excluded from the fund holdings.
ESG Rating	No Rating	No Rating
	B	B
	C	C
	3-Star	3-Star
	4-Star	4-Star
Rating Explanation	With Explanation	This rating measures how well a portfolio and its holdings are performing based on environmental, social, and governance factors in comparison to its peer group. This measure ranges from A (leader), B, C, D to F (laggard).
	With Explanation	This rating measures how well a portfolio and its holdings are performing based on environmental, social, and governance factors in comparison to its peer group. This measure ranges from 5 stars (leader), 4, 3, 2 to 1 star (laggard).
	No Explanation	No explanation
Fund Objective	Enterprise Value	This professionally managed fund provides exposure to a diversified mix of securities with environmental, social, and governance characteristics.
	Impact	This professionally managed fund provides exposure to a diversified mix of securities that are focused on driving positive environmental, social, and governance change.
	Maximized Returns	This professionally managed fund provides exposure to a diversified mix of securities designed to deliver year-over-year growth.
Risk Profile	Medium to Low	Medium to Low
	Medium to High	Medium to High
Past Performance	Better Returns	Image
	Worse Returns	Image
Management Expense Ratio (MER)	MER 1.8%	1.80%
	MER 2.7%	2.70%
	MER 2.3%	2.30%

An example of the two choices of key fact sheets. 

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Bien, Iqbal, Li, Stecher, & Manger (2021). Comparing Environmental, Social, and Governance Ratings Across Stock Exchanges. Global Economic Policy Lab.

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