The psychology of ESG investing

Or how we manage the conflicting emotions that arise from sustainable investing

Every now and then we publish a blog that I think deserves to be widely read. Yes, I hope they are all good (admitting that I am biased) but some are just better, and this is one such. So, if you know anyone who works in helping clients navigate the challenges around ESG and sustainability, or who works in or advises a corporate, please forward this to them.

As always - this is a shortened version of a longer blog that was previously published on The Sustainable Investor. You can read the full version here and see all of our other content, on our dedicated blog platform, you just need to sign in, by clicking here. Its all free for now, which seems to us to be very good value for money.

For this "The Sustainable Investor", there is a shift in tone and focus. In a recently published long blog (we like long blogs as they enable us to go beyond the sound bites) my colleague Ffiona has looked at the psychology of ESG investing. Her specialisation is applying psychology to accelerate sustainability transitions, and she has a particular interest in how we process and absorb ESG and sustainability issues. 

We see this as one of the key underdeveloped areas in sustainable investing. Clearly knowledge of sustainability issues is really important. But how you (and your clients) manage the often conflicting emotions that derive from making decisions related to sustainability and investing is also critical. This is not just a communication issue - it goes much deeper than that.

We think this will be a useful read for anyone who works with clients to help them link sustainability and ESG considerations with the traditional investing metrics of risk, reward and diversification. As such we expect it to be especially useful for private bankers, wealth managers and IFA's. So, if you know people in this group, please forward this on.

However, we think the applicability goes well beyond this. A recent survey from Infosys (ESG Radar 2023) illustrated the challenge. 90% of executives said that ESG initiatives showed positive returns, and yet ...

"even so companies tend to focus more on brand benefits than on other financial outcomes".

This looks to us to be a similar challenge to that faced by client advisors. Given this, the tools and techniques that Ffiona discusses have as much relevance to company management teams, IR and corporate comms, and advisors, as they do to those advising investors.

What can be done to improve client and company decision-making abilities? Historically guidance has been to take emotions out of investing decisions. This is physically impossible, as you may well have experienced as you grapple with worry, excitement or the roller coaster of wavering confidence levels when deciding how to invest. Humans are constantly pounded by emotions. And if the influence of these is ignored, they shape our judgments and actions in unpredictable ways that we can’t control. Like doing your weekly shop on a hungry stomach.

On the flip side, if you get to grips with your own psychology and that of your clients you can use this to your advantage as well as theirs, helping them to make better investment decisions.

There are three psychological challenges that are helpful to know about when advising on ESG and sustainable investing - the riverbed effect, comfort blankets and the lions in the mind.

The Riverbed Effect: Getting stuck in well-established patterns of thinking, finding it mentally strenuous or impossible to look at issues from new perspectives.

Comfort Blankets: Selective interpretation of information, actions or situations, in order for us to feel better about ourselves. This often comes at the cost of factual accuracy.

The Lions in the Mind: Feeling emotionally (threatened), too stressed to think clearly or logically anymore.

Ffiona's blog helps you be more aware of those challenges and how to spot them, plus tools for how you can build up your strategies to manage them.

She also highlights the importance of thinking about your own state of mind. Getting to know your own psychology will make you more aware of how you are likely to interact with different clients, how they are likely to respond to you and how you can adapt your approach to strengthen your collaboration with them. The stronger the collaboration and sense of trust the more likely you are to help them make better decisions.

Finally, knowing the strengths and limitations of your own knowledge will help build trust with your clients, and we all know how important an attribute this is. To learn more, click here and read Ffiona's full blog.

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