Closing the gap: attracting small investors to embrace sustainable investments

Climate change is one of the greatest challenges of this century. With global CO₂ emissions continuing at an alarming rate, global warming will exceed the 1.5°C target even in the best-case scenario. To transition to a net zero global economy, it is essential to invest in new technologies and sustainable infrastructure. Public investment is important, but private investment is crucial too. To reach these climate goals, small private investors need to be mobilised to bridge the funding gap for vital projects. This way, public and private investors can complement each other, sharing capital and risk for the benefit of both.

To fully leverage the financial power of retail investors it is crucial to understand their preferences for sustainable investments. Together with the University of Mainz, we investigated these in our recent research project in Germany.

What are sustainable investments?

The Sustainable Finance Disclosure Regulation (SFDR) defines sustainable investments as

• an investment in an economic activity that contributes to an environmental or social objective;
• an investment that does not significantly harm any environmental or social objective; and
• investee companies following good governance practices with respect to sound management structures, employee relations, remuneration of staff, and tax compliance.[1]

Our project and its findings focus on environmental sustainability in general and draw examples relating to climate finance in particular.

Understanding retail investors: grey, light green, and dark green

Our research reveals that retail investors can be classified into three main types according to their preferences for climate finance: grey, light green, and dark green retail investors. While not explicitly linked to SFDR, these align well with the different types of investments as per Articles 6, 8, and 9 of the SFDR.

• Grey investors (15%) tend to have a neutral or even hostile attitude toward sustainable investing, often connected to concerns over profitability.
• Light green investors (58%) prioritise returns but are also interested in sustainability. They may have the potential to be drawn toward sustainable investing, but their primary motivation remains financial while preferring simple communication through reliable metrics rather than details.
• Dark green investors (27%) are highly focused on sustainability. They are primarily concerned with the impact of their investments and are willing to take on more risk to achieve this goal. Their focus is less on financial return and more on contributing to positive environmental or social change.

What do these preferences tell us?

While grey investors are unlikely to contribute to sustainable financing solely due to preferences for sustainability, there is potential to increase sustainable investments among the other investor types. The largest group of retail investors—light green investors—generally prioritise returns but are also interested in sustainable options if presented simply. The complexity of the many definitions of sustainability, the vast range of products, and the diverse sustainability ratings can overwhelm them. Conversely, dark green investors are willing to engage with complexity and delve deeper into the specifics of sustainability.

Financial advisers, the media, consumer organisations, and the government all have a crucial role to play in leveraging this knowledge to attract more retail investors for sustainable funds.

Financial intermediaries must simplify the details

Overall, the categories of retail investors identified help stakeholders better target their messaging and approach to different types of retail investors. Stakeholders pivotal to disseminate information on the market for sustainable investments among retail investors are financial intermediaries, financial advisors, and bank advisors—even though not all retail investors are able to leverage these services to the same extent.

The divergence between the needs of different retail investors will require financial and bank advisors to respond to the preferences of each group. Proper training for them to recognise and engage each type of investor is crucial to effectively manage these diverse needs.

Financial intermediaries can simplify their offerings of sustainable investment products, making it easy for light green investors to make decisions. For dark green investors, advisors can expand their offerings to include more specialised products and provide detailed, transparent information tailored to this group.

A major problem for advisors is consolidating the vast amount of sustainability data on companies that exist. This includes assessing sustainability ratings, which can vary greatly depending on the source. Since the ratings from agencies often differ substantially, financial advisors must possess considerable expertise to make sense of the information and present it to their clients in an understandable way.

Media and NGOs can shine a light

The media, consumer organisations, and foundations also play a crucial role in informing retail investors about sustainable investing, especially as many investors such as the light greens do not have prior knowledge. In addition, the definition of sustainability among retail investors is changing over time depending on recent events and circumstances. While many retail investors dismissed nuclear energy as not sustainable right after the nuclear accident in Fukushima in 2011, for example, this has shifted in recent years. This varying understanding of sustainability may lead to confusion, especially when investor understanding of sustainability differs from the specific investment products offered. To overcome this barrier, public media, consumer organisations, specialised publications, and NGOs can help provide accurate, current information on sustainable investment practices and regulations. Furthermore, they can help investors grasp how sustainability is defined by regulators, which can alleviate frustration when there is a mismatch between subjective expectations and the existing definitions. These institutions can also offer balanced coverage,highlighting both the positive advances in sustainable finance and the challenges such as greenwashing. By providing this information, they can help create a more informed investor base, which is specifically helpful for light green investors.

Furthermore, consumer centres and foundations can play a key role by helping to educate retail investors about the broader context of sustainability and investment. Offering guidance on navigating changing regulations and helping to clarify what constitutes a sustainable investment can reduce confusion and increase investor confidence.

Governments can support investor confidence

Governments and public policymakers play a pivotal role in promoting sustainable investments. Government-led information campaigns can enhance investor trust and relieve the burden on financial advisors by simplifying the sustainability landscape for both types of green investors. Policies that standardise sustainability definitions—such as providing a clear taxonomy for sustainability ratings—are essential for making these investments more accessible and understandable for retail investors. The EU Taxonomy for Sustainable Activities is a first step in the right direction.

One of the primary policies governments can follow is CO₂ pricing, which increases investor confidence in committing to sustainable investments by creating a predictable, long-term pricing framework. By pricing externalities, many sustainable investments will become profitable and thereby attractive to private investors. Governments can also promote the substitution of non-sustainable technologies and processes with green alternatives or extend regulatory measures to ensure industries transition to greener practices. Additionally, introducing labels for sustainability would make it easier for investors to identify reliable, sustainable options. The SFDR and EU-Taxonomy are a good starting point for this.

Conclusion; clearer, simpler, and more credible

Attracting retail investors to invest sustainably requires a multi-faceted approach, where stakeholders provide transparency, reduce complexity, and build trust among investors. As outlined, there are numerous potential actions that various stakeholders can take to help facilitate this transition to help the different groups of small investors to access and apply information on the sustainability performance of their investments.

More information, transparency, as well as consistent, long-term support from all stakeholders are crucial to attracting small investors to sustainable investments. These initiatives will help ensure the green transition is not simply a vision for the future, but a reality driven by retail investors today.

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In its latest report, our Economic Footprint and Sustainability team examined the role of retail investors in sustainable investment. The study was conducted in collaboration with Johannes Gutenberg University in Mainz, Germany, and funded by the German Federal Ministry of Education and Research and can be found here (only in German).

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