“Sustainable investment may be the safest bet we have because one thing we know is that climate change is happening. You can have different philosophies about where or why, but it is in fact happening.”

Investing in sustainable funds to combat climate change has risen by 34 percent since 2016, according to a report by The Global Sustainable Investment Alliance. Experts say sustainable investing will continue to grow in the coming years, though attitudes about the risk associated with investing in these types of funds remain stagnant. Wharton Marketing Prof. Cait Lamberton, who spoke at the Bloomberg Global Responsible Investing Forum last month, joined Wharton Business Daily host Dan Loney to share her insight.

Interview Highlights

How Sustainable Investing is Different than Traditional Institutional Investing

“The problem with any investment on the retail side for the consumer is that it tends to be a longterm decision. It’s abstract; it’s way out there. And when you layer on that, the motivation is supposed to be not about immediate return [on your investment], although it could be, but it’s about making the world a better place in a very abstract sense. You have two layers of abstraction that can cause problems. Another problem I think these funds need to deal with and perhaps get in front of is skepticism among consumers. Consumers are smart, investors are smart, and this isn’t a time when hypocrisy is going to be tolerated well. Because they are clearly trying to ‘sell something new’ and they’re using a term like ‘sustainability,’ which has had lots of holes poked in it, they need to position [themselves to communicate that] they’re really credible and they’re really sound.”

Attitudes about the Risk of Sustainable Investing

“It’s interesting because on one hand this feels risky, but on the other hand it may be the safest bet we have because one thing we know is that climate change is happening. It’s not really a question. You can have different philosophies about where or why, but it is in fact happening. And so a business trying to address climate change is not such a risky investment. It’s kind of a sure thing. It’s like a company that addresses weather. There will always be weather, and we’re going to have to respond to it. So how much risk is there really? There are also big differences between what the ‘sustainable funds’ are doing. Some of them are just looking for good governance strategies and those are likely to be tied to financial outcomes.”

Sustainable Investment Funds vs. Impact Funds

“Sustainable investment funds are just a filter. They’re just picking and choosing which companies are meeting a set of guidelines [which help the environment]. Impact funds are about creating a positive change specifically investing in companies you think are doing good things. People can calibrate across these factors to manage their risk. Probably the ESGs are going to feel safer than the social impact funds.”

Overcoming the Challenge of a Data Gap

“There isn’t a lot of historical data on these specific [type of] funds. What we do know is that some of the elements are called out in the ESG funds the ones that are focused on environmental, social, and governance factors. Some of those factors are pretty robustly associated with financial performance. And so it’s kind of a no brainer to say, ‘Hey look, these are companies that are very careful about their corporate governance. They’re probably less of a target for regulation. They’re managing potential conflict.’ That is likely to be associated with good performance. Even though the ESG category, as a whole, may not have a ton of historical data.”

Considering Generational Differences

“A lot of the folks who talk about this point to this statistic that 66 percent of millennials say they’re interested in making sustainable investments. The truth is only about 17 percent of them do. And when you look at Gen X, 50 percent say they are interested and maybe about 7 percent of them do. Those are mathematical differences. But what is somewhat surprising is that there’s still a chunk of people who don’t believe that they should be interested at all. And there’s a real disconnect between what they say and what they do. What we know is that the social norm around sustainable investing is stronger among millennials. Do we really know that the behavior is going to be more prevalent? No, we don’t. In some other research when people think there’s an age difference, there’s actually a financial resource difference. It just happens to be correlated with age.”

The Impact of “Learned Helplessness”

“A couple things happen when [something is] publicized all the time. One thing is that we get used to hearing about it and we get used to ignoring it. [People think] ‘Oh, that thing again. Oh, we haven’t fixed it yet? Great.’ So we have to be careful about the way we communicate about sustainability in such a way that it doesn’t just start becoming the background of our lives. Another thing that can happen is that people develop ‘learned helplessness,’ which is basically that you’ve tried stuff and it hasn’t made any difference. [It’s this attitude of] ‘Ten years ago you told me to replace all the light bulbs in my house and that was going to save the planet. So I replaced all the light bulbs and things aren’t really getting better.’ That said, one of the things that you mentioned is that these are tied sometimes to very sacred values and those can be really motivating to people.”

— Emily O’Donnell

Posted: January 22, 2020

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