1 Executive summary - ClimateWorks Foundation · 2020-05-17 · respondents, two of them relate to behavioral processes (lack of organization buy-in and perceived complexity) and

ClimateWorksFoundation|DanyelleGuyattandJulianPoulter 1

1 Executive summary 4

1.1 Researchobjective 5

1.2 Researchsteps 6

1.3 Keythemesandfindings 71.3.1 Aggregatedsurveyfindings 71.3.2 Disaggregatedsurveyfindings,powerrelations 81.3.3 Cognitivedissonance 91.3.4 Interviewthemes 91.3.5 Leadersandbiases 10

1.4 Implicationsforstakeholders 10

1.5 Recommendationsandnextsteps 12

2 Review of research and evidence 13

2.1 Efficientmarkethypothesisandmarketpricing 14

2.2 Perceptionofrisk 15

2.3 Cognitivebiases 16

2.4 Psychological,socialandculturalunderpinnings 17

2.5 Powerrelations 19

3 Survey design and findings 20

3.1 Aggregatesurveyfindings 21

3.1.1 Beliefs 223.1.2 Perceiveddifficulty 233.1.3 Perceivedbehaviourofpeers 243.1.4 Perceiveddifficultyofspecificactions 253.1.5 Perceivedchallengeswithincorporatingintoinvestmentdecisions 253.1.6 Perceptionofriskoftakingaction 263.1.7 PerceptionofriskofNOTtakingaction 273.1.8 Openendedresponses 28

3.2 Powerrelationsfindings 29

3.3 Cognitivedissonance 32


4 Interview design and findings 35

4.1 Interviewdesign 35

4.2 Interviewfindings 36

4.2.1 Overallthemes 364.2.2 Leadersandbiases 39


1 Executive summary “Ourconvictionthatwearerightonclimateisstrongerthanourfearoffailure”QuotefromaCIOatanassetownerorganization

ThispaperpresentsthefindingsofaresearchprojectfundedbyClimateWorksFoundationonInstitutionalInvestorsandtheBehavioralBarrierstoTakingActiononClimateChange.Theprojectfocusesonthebehavioraldriversthatimpactinstitutionalinvestors’abilityand/orwillingnesstointegrateclimate-relatedrisksandopportunitiesintotheirinvestmentdecisions.

Whilemanyinvestorsrecognizethegrowingneedtoincorporateclimatechangeintoinvestmentdecisions,itisnotastraightforwardtaskandthereareamultitudeofchallengesthatinvestorsfacethatslowdownthespeedandscaleofactionrequiredtoadaptinvestmentprocesses.Someofthesechallengeshavebeenwidelydebatedandoftencited,suchaslackofconsistentsignalsfromgovernmentpolicy-makers,theneedtoupscalenewtechnologyadvances,alackofsuitableinvestableopportunitiesorlackofdata,models,orsuitablemetrics.

However,thereareadditionalchallengeswithintheinvestmentcommunitybeyondthosemostcommonlycited(whichtendtobe‘informational’barriers),andtheserelatespecificallytoinvestorbehavioritself(Figure1).Movingbeyondtheneoclassicalassumptionsofrationalityandperfectinformationaspartofthatphilosophy’sinadequateapproachtoinvestingopensupthedoortoconsideringanumberofinternalbehavioralconditionsthatmightbeslowingdownrealactionbyinstitutionalinvestorsonclimatechange.

Figure1.Informationalandbehavioralbarrierstotakingactiononclimatechange


Todate,behavioralbarriersaremuchlesswidelydiscussedinthecontextofinvestorsandclimateaction,althoughtheinvestmentcommunityisawareofsomeoftheseissues,particularlyshort-termism,asevidencedbythedifferentlong-terminvesting‘clubs’[i]thathaveformedovertheyears.Yetattheindustry-widelevel–andindeedattheregulatorylevel–proponentsofinvestoractiononclimatechangetendtofocusmoreonfulfilling‘informational’needs,suchasbestpracticeprocesses,developingnewdata,tools,andmetricsinthehopethatknowledgeandinformationwillpropelinvestorstotakeaction.Indeed,theFinancialStabilityBoard’sTaskforceonClimate-relatedFinancialDisclosurerecommendationsgototheheartofthelackofdataandmetricsandprovideausefulframeworkforcompaniesandinvestorstomoveforwardontheiractionsanddisclosureinrelationtoclimatechange.

However,verylittleattentionis,incomparison,placedonhowknowledgeisprocessedbyinvestorsandinterpretedthroughtheirmentalmodels.Thepsychologicalunderpinningsofinvestmentdecisions,theprevalenceofcognitivebiases,culturaldrivers,andpersonalrelationships(bothattheindividuallevelandinsideandoutsideorganizations),andhowtheseinfluencesmightimpactthelevelofactiononclimatechangeneedsfurtherattention.Puttingitanotherway,theassumptionthatifdecision-makers‘haveinformation,willact’isstillpredicatedontheassumptionofrationality,evenwhenthereisclearevidencethatthisisnotthecase[ii].

Unlesswemoreexplicitlyacknowledgethehumandimensionofinvestmentdecisions,theinvestmentcommunitywillcontinuetoperpetuateandparticipateinshort-termismandfailtoadequatelymanagesystemicrisks,suchasclimatechange.Itisforthisreasonthatwearestudyinginstitutionalinvestorsandtheirresponsetoclimatechangeas“humans”whohaveboundedrationality[iii]andmakedecisionsbasedonarangeofinfluences,someofwhichareconsciousandothersunconsciousorautomatic.


1.1ResearchobjectiveTheaimofthisresearchistoexploresomeofbehavioralcomplexitiesthatariseinrespondingtoclimatechange,fromtheperspectiveofinstitutionalinvestorsthemselves.Ultimately,thegoalofthisfirstphaseofresearchwastorevealandbetterunderstandthebehavioralchallengestoincorporatingclimatechangeintoinvestmentprocesses,suchthatwemightmoveclosertosolutionsandoutcomeswherebyclimatechangerisksandopportunitiesareembeddedintothewayassetsarevaluedandreflectedinhowinvestmentdecisionsaremade(Figure2).

Figure2.Behavioralbarrierstotakingactiononclimatechangeamongstinvestors

1.2 ResearchstepsTheaimwastostudytheinstitutionalinvestmentcommunityfromtheinsideout,toseetheworldthroughtheireyestobetterunderstandtheirperspectiveonclimatechangeandthebarriersthatmightbelimitingwideractiononclimatechange.


Theresearchhasbeencarriedoutthroughanumberofstages,assetoutinFigure3.Theresearch,datacollection,andanalysisoftheresearchwasconductedinsixmainstages:

1. Reviewofrelevantresearchandevidence

2. Designanddistributeasurveytoinstitutionalinvestors(globally,acrossfunctions)

3. UndertakeinterviewswithCIOs,CEOs,andseniorstaffinsideassetownerorganizations[iv]

4. Examinethefindingsanddistillkeythemes

5. Considertheimplicationsforstakeholders

6. Suggestrecommendationsandnextsteps

Figure3.Researchsteps

1.3 Keythemesandfindings

1.3.1AggregatedsurveyfindingsOverallourresearchfoundevidenceofcognitivebiasesandpsychologicalunderpinningsforthese,includingacrosstheareasthatwerethefocusofthisstudy,namelymyopia,herding,andrelianceonheuristicsandrulesofthumb.Inaddition,theopen-endedresponsestothesurveyandthefollow-upinterviewprocessrevealedtheimportanceofotherbehavioralbiasesincludingcognitivedissonance,narrowframing,lossaversion,statusquobias,andoverconfidence.


Figure4.Aggregatesurveyfindings

THEME KEYFINDINGS COGNITIVEBIASES

PSYCHOLOGICALUNDERPINNINGS

Beliefs Thereisgeneralacknowledgmentofclimatechangeasasystemicrisk,butinpracticeattheday-to-daylevel,thereisadegreeofseparationfromtheissueintermsofwhatthatmeansinpractice.

Myopia,cognitivedissonance

Uncertainty,denial,judgmentaldiscounting,perceivedcontrol

PerceivedDifficulty

Thereisgrowingeffortandmomentuminsomeareas(suchasengagementwithcompaniesonclimatechange),yetitisstill“notreallyincorporatedintoinvestmentanalysis.”

Narrowframing,heuristics,lossaversion

Habit,conflictinggoals

PerceivedBehaviorofPeers

Mostrespondentsdonotthinktheirpeersaretakingstrongactiononthisissuesothereisalackofmotivationtoact.

Herding,lossaversion

Tokenismandreboundeffect,socialcomparison,normsandconformity

PerceivedDifficultyofSpecificActions

Thereisadegreeofresistancetochangetoexistingframeworks,ittakestime,energy,andmotivationtoseeitthrough,whichmaynotbepresentattheindividualleveloracrossorganizations.

Heuristicsandrulesofthumb,anchoring

Habit,perceivedriskoftakingaction,conflictinggoals,mistrustandreactance

PerceivedChallengesIncorporatingintoInvestmentDecisions

Ofthethreedominantbarriersthatwereidentifiedbyrespondents,twoofthemrelatetobehavioralprocesses(lackoforganizationbuy-inandperceivedcomplexity)andthethirdrelatestoinformationneeds(lackofdata).

Statusquobias,cognitivedissonance

Habit,socialcomparison,normsandconformity

PerceptionofRiskofTakingAction

Whenitcomestotakingactiontotrytochange“theother”(externalfundmanagersorcompanies),itisconsideredtobeeasier.Whenitcomestochangingtheirownpractices(i.e.,valuationframeworksorassetallocationmodels),thatisconsideredtobemuchmoredifficult.

Statusquobias,narrowframing

Denial,perceivedcontrol,perceivedriskoftakingaction,conflictinggoals

PerceptionofRiskofNOTTakingAction

Halftherespondentsbelievethatfailuretoactonclimatechangewouldnotresultinalessdiversifiedportfolio.

Overconfidenceeffect

Judgmentaldiscounting,denial,beliefinsolutions


1.3.2 Disaggregatedsurveyfindings,powerrelationsToexaminetheprevalenceandroleofpowerrelationsalongtheinvestmentmanagementchain,wedividedupthesampleintoGroup1‘powerful,direct’andGroup2‘lesspowerful,indirect’categoriestolookforanydifferencesthatmightemergeintermsoftheroleandfunctionswithintheinvestmentcommunity,definedas:

Group1–Powerful,Direct:DefinedinthisstudytoincludeChiefInvestmentOfficers,ChiefExecutiveOfficers,assetallocationstrategists,boardmembers,trustees,generalmanagersofinvestments,headsofdivision/department,portfoliomanagers.

Group1samplesizewas42respondentsthatfellintothiscategory,representing47%ofthetotalsamplesizeof89.

Group2–Lesspowerful,Indirect:DefinedinthisstudytoincludeEnvironmentalSocialandGovernance(ESG)/sustainabilityspecialists,consultants,specialistadvisors,independentresearchers,data/analyticsproviders,industryassociations,ornewsserviceproviders.

Group2samplesizewas47respondentsthatfellintothiscategory,representing52%ofthetotalsamplesizeof89.

Ouranalysissuggestedthatthereisadifferencebetweenthoseagentsthathavemoredirectresponsibilityforinvestmentdecisions,comparedtothosethathavemoreindirectinfluence.Thisdifferencewasnotonlyfoundtobestatisticallysignificantatthetotalsamplelevel,butitwasalsosignificantwhensomeoftheindividualbiasesanddriverswereexamined,withGroup1scoringlowerthanGroup2.TheresultsalsosuggestedthatGroup1wasmorelikelytofinditdifficulttointegrateclimatechangeintovaluations,toseehowitfitsintoexistingframeworksandinvestmentpractices,anditscompatibilitywithfiduciaryduty,comparedtoGroup2respondentswhoscoredmorehighlyacrossallofthesedimensions(wherethedifferenceswerealsofoundtobestatisticallysignificant).

1.3.3 Cognitivedissonance

Thedisaggregatedanalysisofthesurveyresponsespointedtoevidenceofagrowingdislocationwithintheinvestmentcommunity,suggestingthatthereisafragmentationofcultureemergingwhichcouldpotentiallydestabilizethestatusquoandallownewperspectivestofilterthroughthesystem.Aframeworkispresentedinthispapertosupportatheoryofchange,wherethegreaterthedivergencewithintheinvestmentcommunity,theharderitwillbeforresistantinvestorstocontinuerespondingtotheprevalenceofdissonancethroughdenialordefensiveness,butrathershiftmoreinvestorsontoapathwayofdecisiveaction.


1.3.4 InterviewthemesTherewereanumberofthemesthatemergedfromtheinterviewsintermsofhowindividualsinseniorpositionsinsideassetownerorganizationshavepersonallyexperiencedthechallengeswithincorporatingclimatechangeintoinvestmentprocesses.Theinsightsweremanyandvarious,butthehighlightsoftheseinteractionsrevealedthefollowing:

Leadershipsuccessinovercomingbarriers:Nomatterwheretheinspirationforleadershipwithinafundcamefromorhowitspread,theleadersdisplayedasurprisinglybroadsuccessrateacrossalltypesofbehavioralbarriersandweremorethanhappytolivewiththediscomfortofpotentialreputational,career,andotherrisks.

Informationversusbehavioralbarriers:Nointervieweesfeltthatthechallengeswithtakingactiononclimatechangewaspurelyduetolackofdataoravailabilityofmodels–orevenpolicyortechnologybreakthroughs–alltheintervieweestalkedabouttheimportanceofpeople,trust,andpersonalrelationshipsinsidetheirorganizations.

Beliefs:Personalbeliefprovidedalotofthedeterminationtodosomethingdifferentfromtheirpeers–notamoralorethicalbelief,butonesteepedinthebeliefthatclimatechangeisnotgoingaway,andthatmitigationisthelogicalthingtodo.

Trust:Strongoverallfund/individualperformanceisakeyelementthatallowedanindividualtodriveaproactiveclimateagendaanddevelopastrategy.Thisperformancecreatestrustfromtheboardthatallowstheboardtoovercomeanyfearsaboutriskinbeinguniqueorproactiveoverclimate.Italsoallowedleaderstorideoutanydifficultperiodswhere(forexample)climate-relatedinvestmentdecisionsmightgenerateshort-termunderperformance.

Culture:PressureonC-suiteexecutivesfromevenoneortwoboardmembersappearstobehelpfultoopenupadialogueontheissue,buildingaculturethatembraceschangeandultimatelydrivesaction.

Perceptionofrisk:Theintervieweesallfeltthatthedegreeoffinancialrisktobecomealeaderwassmall.Thisisunderstoodbytheleaderswhocanallocatecapitaltolowcarbonassetsandstilltakeminimalcareerorreputationalrisk.

Findingthecomfortzone:Therewassomeevidenceofanchoringamongsttheintervieweestowhattheyfeelmostcomfortablewith.Mostexplainedthatitisfareasiertoexpandafund’sclimatestrategyandinvestinlowcarbonopportunitiesifthereturnsfromexistinginvestmentsarereasonable.Accordingtomostoftheinterviewees,thereturnsdon’thavetobehigherthanotherareas,justcomparabletootheropportunitiesinsimilarassetclasses.

Peers:Ratherthanfeelingpressuretostayinthepackandnotgotoofarfromthe‘norm,’theleaderswereoftendisparagingofpeerswhohadfailedtoseetheobviousrisksorwhowereunwillingtoovercomeanyfearsorbiasesinordertoadjusttheirinvestmentprocessesinviewofclimate-relatedimpacts.


Externalpressure:Ourdiscussionsindicatedthatexternalpressurefrombeneficiaries/members,employers,regulators,NGOs,orthemediatotakeactioncanbeeffectiveatovercomingbehavioralbarriersby(forexample)helpingkeydecision-makerstoprioritizeclimatechangeinternallyacrossassetowners’executivefunctions.

1.3.5 Leadersandbiases

Withacknowledgementoftheinherentselectionbiasintheintervieweesthatwasskewedtowardstheleadersversusthoseinvestorsthatarelessprogressedintermsofclimatechangeaction(asthelatterisalsolikelytobelesswillingtoparticipateinstudiessuchasthis),someofthemostsurprisingfindingsconcernedbehavioralbiasesthatwehadanticipatedinouranalysisbutactuallydidn’tshownupininterviews.Theabsenceofmanyofthesebiasesinleaderswasoneofthemostimportantfindingsofthestudybecauseitdemonstratesthatwithsomeeffortandattention,thesebiasesarenota‘given’andcanbeovercome.Indeed,theseinsightswillhelptoguidefurthereffortstodesignsolutionsandaltertheframingofclimatechangeinsidetheexecutiveofassetownerorganizationsasawaytoovercomethebiasesthatmayprevailoutsideoftheso-called‘leading’communityofinvestors.

1.4 ImplicationsforstakeholdersThefindingsofthisreporthavepotentialimplicationsforassetownerorganizationsintermsofhowtheyevaluateandconducttheirinvestmentdecision-makingprocesses,governancearrangements,andthequestioningofassumptionsaroundexistingbeliefsandnarratives,particularlywithrespecttohowtheyaremanagingclimatechangeimpacts.Itwillalsohavepotentialimplicationsforhowdifferentindustrygroupsandassociationscommunicatewithinvestors,developguidancematerial,conductworkshops,designsurveys,presentevidence,andestablishnewframeworkstosupportinvestoractiononclimatechange(Figure5).

Itisclearthatleadershipcreatesmoreleadershipandthatwehavetoleveragethepoweroftheleadersandtheirstoriesandexperienceinafarmorecoordinatedmannerinordertoshifttheconsensusposition.Theleaderscanbefarmoreinfluentialthanexternalexpertsrecommendingastrategy.However,expertscanfacilitateleadershipamongstpeers.

ThedatafromthePRI’ssupportedInevitablePolicyResponseinitiativewillbeimportanttohelpfacilitatebehavioralchangeandthefindingsofthisresearchwillbeimmediatelysharedwithallinvestmentassociationsthatcanusetheseinsightstoworkwithinvestors.


Figure5.Stakeholderrecommendations

STAKEHOLDERS RECOMMENDATIONS

CIOs,CEOs,boardmembers,trustees ● Buildawarenessofbehavioralissuesandsubjectmatterinordertocritiquetheirownthinkingandthebehaviorsofothers

● Reviewgovernancearrangementsandseektodiversifyseniorlayersofdecision-making

● Gobeyondinformationandaskmorechallengingquestionsaroundbeliefsandattitudes

● Createaninternalsponsorforbehavioralissues

● Agreeonaprocesstoaddressthebehavioralchallenges

● Learnfromleaders–orifaleader,bewillingtoengagewithpeers

● Integratebehavioralinsightsintothedesignandimplementationofclimate-relatedinvestmentstrategiesasacross-checktodecision-makingprocesses

ESG/sustainabilityspecialists ● BuildskillstointeractinternallyandengagewithCIOs,CEOs,boardmembers,andtrustees,tochallengetheembeddedhierarchiesandpowerrelationsthatmaylimitaction

● Championtheimportanceofaddressingbehavioralbarrierstoclimatechangeinternallyattheorganizationlevelandalsoacrossthewiderindustry

● Participateandbolstercollaborativeinitiativesfocusedonimprovingdecision-makingandfosteringbehaviorthatismorecloselyalignedwithclimate-relatedpoliciesandbeliefs

Industrybodiesandassociations ● Widenthefocusofattentionfrominformationneedstoconsiderbehavioralshortcomingsthroughdesignofoutreachwithmembers,guidancedocuments,events

● Embedanawarenessofcognitivebiases,psychology,andsocialandculturalinfluencesintostrategyforoutreachandmobilizationplansonclimateaction

Funders ● Reflectbehavioralbarriersinfundingstrategies

● Helpbuildandfundcollaborativenetworks

Educatorsandresearchers ● Undertakemoreresearchon‘realworld’behavioralbarriersamongstinvestorstotakingactiononclimatechange


Regulators ● Considerimplicationsofcognitivebiasesandpsychological,social,andculturaldriversforbestpracticegovernancestandardsacrossthefinancialsector

● Buildstandardsaroundbestpracticebehaviorsandhumanrelationshipstofosterlong-termism,notonlyincentivesbutthroughorganizationaldesignandchallengingprevailingpowerrelations

● Buildsystemstoidentifyearlywarningsignsandremediesforshort-terminvestorbehavior

Serviceproviders ● Considerthebehavioralbiasesthatmayprevailwithintheirowninternaldecision-makingprocesses

● Understandthepotentialbiasesoftheirclientsandstakeholders

● Integratethisunderstandingintotheirproductandservicedesign

NGOs ● Ensurecontextofbehavioralbarriersembeddedincommunicationandengagementstrategies

1.5 RecommendationsandnextstepsInordertoconvertthisfirstphaseofresearchintofunctionaltoolsandpracticalguidance,asecondphaseoftheprogramisrequiredto:

● Buildontheunderstandingofthepsychological,social,andculturalbarriersthatareslowingdownorstoppingactiononclimatechange,beyonddata

● Integratethefindingsintoexistinginvestorprogramsandoutreacheffortswiththeirmembers

● Designsolutionstoshiftinvestorbehavioronclimatechangetoachievedesiredoutcomes,includingchallengingprevailingpowerrelations

● Developresearch,tools,andcollaborationefforts,includingaleadershiphub

● Shifttheconsensuspositiontooneofcollectiveleadership

Documents

1 Executive summary - ClimateWorks Foundation · 2020-05-17 · respondents, two of them relate to behavioral processes (lack of organization buy-in and perceived complexity) and