Sunday Brunch: 11 June 2023
Why, as sustainable investors, we need to understand human behavior
Understanding human behavior is critical to all aspects of sustainable investing. If we don't know why people do things, we cannot get them to change. And if they are not going to change, we will need to rethink how we make company business model's sustainable and financially viable.
One of the things that has always fascinated me is why people behave the way they do. I don't mean what they say, but what they do. This distinction is really important, as many people express one view, and then act in a totally different way. Examples are the people who care about the environment, but still buy fast fashion. Or those who say they want healthier food, but actually mostly buy cheap or ultra processed products. Or those who smoke, despite all of the evidence around harm to their health.
This is what is known as the values-behavior gap. And it's more common than you might think. Actual behaviour is often driven by practicalities not principles. And it's why you should retain a degree of skepticism about surveys that say things like ... nearly 90% of Gen X consumers said that they would be willing to spend an extra 10% or more for sustainable products, compared to just over 34% two years ago. Or being even more cynical, you should be careful of accepting survey's that confirm your view of the world.
Plus, from a sustainability perspective, we have the ongoing debate around how do we best communicate the need for action on climate, biodiversity and a just society, in a way that actually drives concrete change rather than apathy, opposition or despair (or lots of talking but no action). This is intrinsically linked to the financial issue above. As we frequently point out, if we cannot finance the sustainability transitions, they will just not happen - at least not at the pace and scale we need.
Questions like these actually sit at the heart of sustainable finance. If companies do not have a product or service that people want, and are prepared to pay for, they do not have the first important building block for a sustainable business model.
Why are Values important?
To quote Steven Johnson and the team at BCW Movatory....
Our values define us. They shape our identities, and influence everything we think, feel, and do. The importance of values has been hardwired through evolution. Shared values were essential for building collaboration and the social groups that have defined the success of human beings as a species.
Our values are a good (but not perfect) predictor of how we will behave in certain situations. Putting this in a financial context. It's our values that lie at the heart of most financial decisions we make. Who we vote for (and hence the economic and regulatory framework that companies have to operate in), the food and clothes we buy, and even how we heat and cool our homes. Plus, our collective values define the social license to operate. And, of course, they define where we would like our money to be invested. Our values are a good (but not perfect) predictor of our behaviour.
The good news here is that the recently published research from Steven Johnson and the team at BCW Movatory suggests that values that are consistent with supporting sustainability are high on most peoples priorities. Their research sampled more than 36,000 people across 30 markets. To quote the report:
"people around the world care not just about preserving and protecting their own wellbeing but also the people around them. 57% of global respondents told us it is important to be loyal to their friends and almost the same proportion, 56% said they strongly believe that everyone should be treated equally and have access to the same opportunities".
This is reflected in the results from a variety of countries that show that values such as Benevolence (which promotes the welfare of people we are in frequent contact with) and Universalism Societal (which motivates us to promote understanding, appreciation, tolerance, and protection of all people in society) score highly.
Now the not so good news.
The reality is that while our values might predispose us to certain behaviours, other factors can mean we end up doing something completely different (the values-behavior gap we highlighted earlier). This includes how we feel economically, but also how time and opportunity limited we are.
While this is an issue across all generations, it's especially the case for Gen Z's. They are an important group, making up 30% of the global population, contributing close to 27% of the workforce (by 2025) and having a combined purchasing power of over $100 billion. The blue bars in the chart below show what percentage of Gen Z's feel they are not living their lives according to their values.
Some analysts I have spoken to about Gen Z's suggest this sense of 'disappointment' is something all generations go through. That it will reduce as they get older. Maybe this is true. But, when you combine this data with the survey finding that only a quarter of all people globally (not just Gen Z's) believe that their government does not share their values - you can see a big disconnect.
The other value that comes high up the list, especially in countries such as Japan, Russia and China, plus the UK, is Security. It has various attributes, but one we need to watch is a desire for stability - or putting it another way, a reluctance to change. Change, even if your logic brain knows it is the right thing to do, is hard.
What does this mean for Sustainable Finance?
First, we suggest we are due a rethink as to how we communicate sustainable finance. We have to accept that we are speaking to a very skeptical audience. Reports such as this recent one from Bloomberg, suggesting that just 5% of passive ESG fund investments actually make a climate impact, are feeding this skepticism. We argue that we need to present people with the full picture, warts and all.
Second, we have to factor into our discussion the very real risk that change does not happen, or if it does, it's not as fast as we want or need. This raises some interesting questions about what is the best investment path. Do we continue to invest as if the Paris Agreement targets will be met, even if this reduces financial returns. If this is our plan, then we need an honest and robust discussion with our investors.
Thirdly, and more positively. We need to broaden the discussion about how companies acting with purpose also create financial value. It's something that Alex Edmans (of Grow the Pie fame) and Rebecca Henderson (author of Reimaging Capitalism in a World on Fire) have been researching and speaking on for a while now. More of us need to listen.
What caught our eye this week
Norway Transparency Act reporting deadline looms.
Philip Mitchell, Senior Sustainability Advisor at Formue, discusses a law that most people outside Norway have probably never heard of - Åpenhetsloven ("Transparency law"). This came into being in July 2022, but there will be a wave of reporting on human rights by approximately 9,000 Norwegian companies in June 2023 as the first deadline nears. As a precursor to some elements of supply-chain due diligence within the EU's newly-approved Corporate Sustainability Due Diligence Directive (CSDDD) which is expected to be formerly adopted in 2024, there will be useful takeaways both for European companies, and for global investors.
Another supply chain law that came into effect even earlier in Germany on 1 January 2023 - the Lieferkettensorgaltspflichtengesetz or 'German Supply Chain Due Diligence Act' - has also been instructive. Responsibility for supply chains, legal action in your home country for acts elsewhere and the impacts of international agreements make this a broader topic that companies should sit up and take notice of. Companies that do not prepare will lose competitive positioning; it's not just about paying fines anymore.
Link to blogs 👇🏾(click on the image)
(Transition / Human Rights, Professional)
Canada wildfires: US East Coast sees worst air quality in years
Data from the US EPA's Air Quality Index showed on Thursday that cities in North America had the worst air quality in the world. The air pollution is being driven by smoke from severe wildfires in Canada (more than 2,300 fires consuming 4 million hectares) which in turn are a result of a significantly warmer and drier spring than normal. In other words, climate change.
Air pollution (specifically PM2.5) can trigger tumour growth in EGFR-driven lung cancer. We wrote about this discovery in a 'Quick Insight' back in September 2022. Globally, about 300,000 lung cancer deaths in 2019 were attributed to exposure to PM2.5 and it is estimated that 1 in 10 cases of lung cancer in the UK are caused by outdoor air pollution. Air pollution has a number of adverse health impacts, which we discuss in a Deep Dive too (see below in the 'what our subscribers are reading' section).
Link to blog 👇🏾(click on the image)
And finally - one from the archive
Continuing the theme of how people think, at the beginning of this year our colleague Ffiona (who is a business psychologist - and so well qualified to write on these matters) published a deep dive on why we need to be aware of our mental failings when we think about ESG and Sustainability. At a time when ESG has become such a divisive term, its worth reminding ourselves of the strong emotions the topic can create.
One of the biggest real-world challenges for everyone involved with sustainability and finance/investing is managing the complex emotions involved. The group most on the front line in this are the advisers. Many are unsure how to engage with clients’ worries, suspicions or resistance to ESG and sustainable investments. They want to make the debate understandable but can struggle with over simplifying often complex issues. And it can be hard to silence the siren voices that promise easy and painless solutions. Plus, adding sustainability into the mix is difficult in a world that has historically focused on risk, reward and diversification. While being informed is important, the answer is not just more facts. We all need to help our clients adopt a new mindset, as well as evolve our own.
Link to blog 👇🏾(click on the image)