1 executive summary - climateworks foundation · 2020-05-17 · respondents, two of them relate to...
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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
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4 Interview design and findings 35
4.1 Interviewdesign 35
4.2 Interviewfindings 36
4.2.1 Overallthemes 364.2.2 Leadersandbiases 39
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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
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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.
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1.1ResearchobjectiveTheaimofthisresearchistoexploresomeofbehavioralcomplexitiesthatariseinrespondingtoclimatechange,fromtheperspectiveofinstitutionalinvestorsthemselves.Ultimately,thegoalofthisfirstphaseofresearchwastorevealandbetterunderstandthebehavioralchallengestoincorporatingclimatechangeintoinvestmentprocesses,suchthatwemightmoveclosertosolutionsandoutcomeswherebyclimatechangerisksandopportunitiesareembeddedintothewayassetsarevaluedandreflectedinhowinvestmentdecisionsaremade(Figure2).
Figure2.Behavioralbarrierstotakingactiononclimatechangeamongstinvestors
1.2 ResearchstepsTheaimwastostudytheinstitutionalinvestmentcommunityfromtheinsideout,toseetheworldthroughtheireyestobetterunderstandtheirperspectiveonclimatechangeandthebarriersthatmightbelimitingwideractiononclimatechange.
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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.
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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
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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.
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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.
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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.
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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
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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