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ESG and behavioural economics: why we don’t respond to climate change the way we do to Covid-19

By: Jack Dominy


At the start of 2020, responsible investing (RI) was the talking point throughout the asset management industry. Climate change as well as a range of other important ESG issues had accelerated to the top of the agenda throughout 2019. Indeed, by the beginning of this year, RI was no longer merely a discussion point, but a key tenet of both investment decision making and asset managers’ marcomms efforts.

However, with the spread of Covid-19 across the world, and its impact on economic output and markets, the pandemic is now, quite rightly, at the forefront of investment management’s collective mind. Attentions have turned to the uncertainty that lies ahead and the likely impact on different asset classes and ultimately, clients’ savings and retirement pots. Asset managers look to communicate their thoughts to investors and financial advisers, while advisers try to reassure their clients, during a very volatile period in which the best wisdom of yesterday may not suit today’s situation.

This does not mean RI should be considered any less important. The impact of Covid-19 is very real and its lasting effect on the world economy will no doubt be severe, with many countries likely to slip into recession. So-called ‘helicopter money’ may even be needed to re-balance the financial systems. However, in the coming months, the crisis could further highlight the importance of RI in the future, as opposed to casting a shadow over it.

The impact on economies and markets worldwide from Covid-19 is very tangible and stark. Whilst the virus is invisible, it is an individual entity and the impact on assets and economies is clear. The impact itself has also been rapid and devastating, with all non-essential businesses being forced to close and spiking unemployment.

The effects of climate change, pollution and other ESG issues are arguably less tangible to investors, because there are several elements encapsulated. Actions by individuals, businesses and countries which have impacted negatively on climate change and other ESG issues are harder to quantify because several contributing factors can sum to a large-scale problem. Some of these actions may be small or immeasurable, but when added together, create a crucial issue for the financial system in the foreseeable future.

Nobody would doubt the importance of issues such as access to clean water, excellent sanitation or food hygiene when considering what some of the key factors are that contribute to a strong public health system. Indeed, such factors are relevant to the Covid-19 crisis, as they can all be placed within the ‘S’ of the ESG umbrella. Placing more of a focus on these social issues when it comes to investing can therefore help to prevent future pandemics. This certainly highlights how RI can be a real force for change for vital problems that the world is facing and may continue to face. But future pandemics are exactly that – they are future possibilities, not present concerns.

And maybe that is the overarching challenge here. There is a behavioural tendency amongst human beings to focus on the present and discount the future, which has likely resulted in RI not being given the significance it requires. Humans are also more likely to care about events and scenarios that are more personal to them. The image of a polar bear on a melting ice cap is thought to be powerful and emotive. However, it could be argued that this is actually not a wholly relatable image to many people, especially when compared to the effects of the virus, such as knowing people who have fallen ill or seeing a chart showing the death toll for their country or local area. The latter are more personal and more likely to hit home because they are closer to home.

To be clear, this is certainly not to say that the present coronavirus pandemic should be given any less importance. Indeed, it adds further weight to the argument of focusing attention on those issues which are more immediate, transparent and present.

But if RI is to have a truly resounding effect, these present and personal biases must be overcome by all those involved in the investment management industry, in order to limit the impact of climate change now. It must no longer be tomorrow’s problem; it is a crisis which, like Covid-19, the industry and the world faces today.

Research in Finance launched the Responsible Investment Review in 2018 in order to track the trends taking shape in the industry at the time. The report indicated a growing need for a regular study in this increasingly critical area, and so the UK Responsible Investing Study (UKRIS) was launched in May 2019, future research waves taking place annually.

UKRIS focuses squarely on professional investors, both retail and institutional, and their view of ESG and responsible investments. The study builds on key questions posed for the Responsible Investment Review, but also provides further detail on perceived market leaders, the most important ESG issues and information sources from asset managers valued by professional investors.

Research in Finance is offering a package which includes the Responsible Investment Review, the UKRIS Retail report, the UKRIS Institutional report and a 1-hour workshop to discuss the findings. If you would like to know more about these influential studies and what is on offer, please contact Toby Finden-Crofts, Richard Ley , Annalise Toberman or Jack Dominy.

The UKRIS quantitative research surveyed 211 retail intermediaries and 155 institutional investors, providing a wealth of information. The retail study included a mix of DFMs and IAs, while the institutional study gathered views from consultants, professional trustees, scheme managers, pension CIOs and trustees. Fieldwork was conducted in Q4 2019 for the retail component and in Q1 2020 for the institutional component.


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