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Navigating the behavioural complexities of Responsible Investing

Navigating the behavioural complexities of Responsible Investing

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Responsible Investing (RI) is growing and approaching maturity, and complexities around how it is perceived, interpreted and communicated are compounding. As this happens, it will only get easier to get bogged down in definitional debates, blame-gaming, and finding flaws. However, for the ultimate intention of RI and ESG to be realised, it’s important to understand, and mitigate, the behavioural traps that surround RI. 

This emerged clearly in our research conducted in partnership with University of Pennsylvania which set about to paint a picture of Responsible Investing through a behavioural lens. Many of our interviewees seemed brace to answer the question: “Can you be a responsible investor if you invest in Sasol?”.

It seems questions like this have become common, and investment professionals are bracing themselves to refute this over-simplification. The challenge is that for those further along the value chain, they want black-and-white answers. This is a natural human impulse – our brains want things simple. If the experts don’t provide a route to simplification, individuals will find their own, and more often than not, this will be less than optimal. 

As we examined this, it became clear that there are a few behavioural traps around Responsible investing that could leave it falling short of its intentions for widespread systemic change: 

1. Broken telephone 

What do you hear when someone says “Responsible Investor”? 

Whatever picture you have in your head is almost certainly different to what someone else would have in mind. Time and again, the research picked up issues with alignment – and this goes for the plethora of terminology around RI, including “responsible investing”, “sustainable investing”, “socially responsible investing”, “ethical investing”, “impact investing” and “ESG”? 

As the field grows, the terms and the definitions proliferate, creating potential for broken telephone at almost every point in the value chain. 

Beyond even the terms, there is more and more content on the topic. From a behavioural science perspective this puts us squarely in the world of “choice overload”, “cognitive overload” and “decision fatigue”. Choice overload is when we have too many choices. And when there are too many choices, chances are we won’t choose anything. In the context of Responsible Investing, one could get easily get overwhelmed with all the options, which means that there is a high likelihood for people to disengage. 

This isn’t good in a field striving to change the world. There is also the issue of “decision fatigue”. If choice overload is when we disengage due to having too many options in a single choice, “decision fatigue” is when we disengage due to having to make too many choices in quick succession. The “responsible investing” field is chock-full of issues to make decisions on, which can cause the brain to take a lot of strain. 

How do we fix this? 

In our research, several of our interviews started with stakeholders laying the groundwork of what they mean. This is great place to start. If you don’t want people to disengage, we must start with being clear on what we mean and spend less time arguing about definitions. This way, even if two people don’t have the same picture in mind, the clarity of communication means we can at least move forward from the same starting point. 

So, what do we mean at Nedgroup Investments? 

(1) ESG relates to factors within the investment analysis process; 
(2) Stewardship is our responsibility to be active shareholders; and 
(3) Responsible Investing is the combination of the two; 

2. The bystander effect 

Our research showed that there are many players in the value chain that think responsible investing is a ‘good idea’ and ‘something we ought to do’. But with the caveat that what ought to be done ought to be done by someone else. 

In behavioural science, this links to the “bystander effect”*. This is when a large group can see that something needs to happen, but everyone expects someone else to act. The risk is that no one acts, even though everyone agrees that someone should. 

This can be related to the “locus of control”. Our locus of control is what we think will affect us, and how ‘under our own control’ this is, as well as what we think we can affect. From an RI perspective, while everyone may agree that RI goals are worthwhile, from reducing emissions to improving socio-economic mobility, individuals may also believe they can do little to contribute. 

The combination of believing someone else will act - and the belief that if we did act, we would accomplish little - can stultify progress. 

The financial services value chain is a long one, and it is unlikely that having only one link in the chain acting on the issue is likely to be sufficient. As an example, research at TD Wealth in Canada showed that even when an individual had a strong preference to invest sustainably, they typically only acted on this if an adviser had engaged with them on the topic. Similarly, an adviser can do very little if fund providers don’t indicate their position on responsible investing and provide funds across the range of end-client preferences. 

How do we fix this? 

For any individual in the value chain that sees value in responsible investing, it is critical that they examine their role and what they can do. Raising questions can be a surprisingly easy way to start shifting thinking and behaviour. Similarly, signalling that responsible investing is important can play a disproportionate role in affecting change.

In Cass Sunstein’s work on “How Change Happens”, what often holds big shifts back is when people believe that they are the only ones who care about an issue. On a range of issues, from climate to social inclusion and diversity, we often under-estimate how many people do agree with us on the importance of change.

For instance, recent research on this phenomenon of “pluralistic ignorance” found that Americans under-estimate by half how many individuals share their views on climate change. To combat this, signalling one’s opinions frees up the stakeholders around that individual to say the same, and this gives change a chance to snowball. One simple way we have done this is that both Nedgroup Investments and Nedbank Wealth are now signatories to the United Nations’ Principle for Responsible Investing (“UN PRI”). 

3. Asymmetry of incentives 

Being accused of “greenwashing” is becoming both more common, and more dangerous. In any new field, working out what to measure and what counts as “good” is an important teething question. However, the risk is that if the penalties for “greenwashing” are too high, the incentive for ambition is dampened. 

When it comes to incentives, a founding insight of behavioural economics is that losses and gains are not equal. Quite literally, “a bird in hand is worth two in the bush”. I’d rather hang on to what I have than risk losing it to get twice the prize. 

What counts as a loss is tricky, but what matters for our discussion is that if the loss of face associated with “greenwashing” is too high, then few organisations may be willing to risk being bold. 

At the extreme, this could look like most organisations clustering around the increasingly regulated minimum, with only a small scattering of organisations attempting to show leadership. In an environment like this, even the leadership shown is likely to be less than what would happen if the space was highly competitive. 

The rewards to leadership can be further curtailed if “greenwashing” becomes highly associated with bold claims. 

If bold ambition in sustainability becomes associated with “greenwashing” in the minds of the broader public and end-clients, then the penalties for failure grow and the rewards for leadership erode. This asymmetry in incentives is far more likely to drive compliant action from industry than it is to stimulate co-opetition around improvements. Nobody wins. The power of competition goes unharnessed, and we end up with regulators having to define more and more, and to introduce more and more sticks. 

How do we fix this? 

Given the growth that responsible investing has seen, now may be the moment to allow for greater differentiation and variety in approaches. Rather than having to rank all against all, we can make it easier to compare across attributes, making it easier for investors to match their preferences for responsible investing to an appropriate manager and portfolio. This aligns with what market mechanisms do best. There are definitely ESG issues that fall into the regulatory bucket, but there are also issues which are more complex – and where the single right answer is not clear. 

This is where markets can play a role. From market participants to firms to investment managers and all the players along the chain, this requires a greater level of clarity. One way to provide that clarity is to set and convey goals and key focus areas within the responsible investing universe. A

s an example, at Nedgroup Investments, we have selected 4 key focus areas: 

(1) Climate Change; 
(2) Biodiversity Loss; 
(3) Diversity and Inclusion; 
(4) Labour and human rights. 


While our understanding of ESG issues is only likely to become more nuanced as work continues, this needs to be balanced with the ability to communicate more easily about the topic. This is the crux of the 3 challenges discussed above. Communication does not require agreement, but it does require clarity. Stakeholders need to be clear with one another about what they mean, what they care about, and what they would like to achieve. 

The original source for the bystander effect has come under increasing scrutiny and as outlined by Rutger Bregman in his critique of the effect in “Human Kind” it has flaws. But the related research of the locus of control and pluralistic ignorance still has a bearing in this specific context.