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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

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2 Review of research and evidence Thisstudydrawsfromthegrowingbodyofacademicandindustryresearchonthebehavioralbarriersthatlimitclimatechangeaction.Mostoftheresearchdoesnotdirectlyaddresstheinstitutionalinvestorcommunity(withafewexceptions[v]).Rather,itfocusesontheroleofconsumersandpoliticalagentsinmitigatingclimatechange.Nevertheless,thereisaplethoraofresearchandliteraturerelevanttobetterunderstandingthebehavioralbarrierstotakingactiononclimatechangeamongstinstitutionalinvestors.Forthepurposesofthisstudy,thesearesynthesizedinFigure6.

Figure6.Behavioralbarrierstotakingactiononclimatechangeamongstinvestors

Theaimofthestudywastobetterunderstandsomeofthebehavioralbarriersofinstitutionalinvestorsthatmaylimittheextenttowhichclimate-relatedrisksandopportunitiesareadequatelyreflectedintomarketpricing,valuations,portfolioconstruction,andinvestmentdecision-makingprocesses.Thiswasexaminedbyconsideringthefollowingareasofresearch:

● Perceptionofrisk:Betterunderstandinvestors’perceptionofriskassociatedwithchangingbehaviortoincorporateclimate-relatedimpactsintovaluationframeworks,portfolioconstruction,andinvestmentdecision-makingprocesses.

● Cognitivebiases:Considertheprevalenceofbehavioralbiases(inparticularshort-termism,heuristics,herding,andcognitivedissonance)tobetterunderstandsomeofthepracticalchallengestoshiftingbehavior.

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● Psychological,social,andculturalunderpinnings:Betterunderstandthepsychological,social,andculturalinfluencesthatimpacttheextenttowhichinvestorsarewillingand/orabletoincorporateclimatechangeintoinvestmentprocesses.

● Powerrelations:Buildagreaterawarenessofthedifferentrolesthatagentsplayandtheirinfluencealongtheinvestmentmanagementchainandwithinorganizations,tofurtherescalateinvestoractiononclimatechange.

2.1 Efficientmarkethypothesis(EMH)andmarketpricingWhenitcomestomanagingsystemicriskssuchasclimatechange,theassumptionthatthemarketisabletopriceincomplexityanduncertaintyinarationalandorderlywayneedstoberevisited.Indeed,theworkofmanyeconomicpsychologistsandbehavioralfinancierssuggeststhathumanbehaviordoesnotalwaysconformtotheexpectedbehaviorofarationaleconomicagent,andfinancialassetsarenotalwaysabletoreflectallpublicinformationcorrectly,atalltimes.Indeed,assetscanbemis-pricedforasignificantperiodoftime,oftenresultinginbubblesinassetpricesthatprecedeacollapse;thetechnologybubbleandtheglobalfinancialcrisisarefairlyrecentexamplesofthesetendencies.

Violationsoftheefficientandrationalmarketmodelhavebeenfoundtobesystematic,robust,andfundamental,suggestingthatwemayneedanewparadigmthatreflectsinvestorbehaviorandhowmarketsactuallyoperate.Indeed,asShillerobserved,therecanbeperiodswhereitisobvioustosomethatthereisasystemicmis-pricingofassetvalues,yetsuchasituationcanpersistforsometime.Indeed,theawarenessbysome(perhapstheso-called‘smartmoney’)thatamis-pricingexistsdoesnotnecessarilymeanthatsuchasituationwillbecorrectedanytimesoon.AsShillernotedinrelationtoover-pricedassetsintheleaduptotheburstingofthetechnologybubblein1999/2000:

“Thosewhodoubtthevalueofthese[mis-priced]stockscouldtrytosellthemshort…buttheirwillingnesstodosoislimited,partlysincethereisalwaysapossibilitythatthestockwouldbebidupevenfurtherbyenthusiasticinvestors….Absurdpricessometimeslastalongtime.”Shiller(2005:181)

Allofthispointstoagreatercomplexityintheinvestors,ashumansthatarebehindtheinvestmentdecisions,thantheEMHallowsfor.Indeed,inthecontextofclimatechangethereappearstobeagrowingsenseofconcernandevidenceofthepotentialforsomehighcarbonassetstobecomestrandedorsignificantlyre-priceddownwardsinviewoftheemergingpolicyandtechnologyshiftstosupporttheshifttoalowcarboneconomy.Likewise,manylowcarbonassetsmanynothavefullypricedintheir(true)long-termpotentialupsideinacarbonconstrainedworld.

AsHighlight1suggests,thegrowingawarenessofmis-pricingamongstinvestorsonclimate-relatedimpactsisapointofinteresttofurtherexplore,asitsuggeststhatbehavioraldriversmightbeholdingbackaction.Inotherwords,thelimitationstoactionreflectmorethananinformational(orreporting)challenge.

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Highlight1.Investors’perceptionofmarketmis-pricingofclimaterisks

Ourresearchexploresinvestors’perceptionofhowwellthemarketispricinginclimate-relatedrisksandopportunitiesintoassetvaluations.Theperceptionaroundmarketpricingisinformativeasitindicatestheextenttowhichinvestorsbelieve(ornot)thereisapersistentmarketmis-pricingthatdoesnotadequatelyincorporateclimate-relatedimpacts.

AccordingtotheEMH,arationalresponsetopersistentmarketmis-pricingwouldbetoexploitorpositionportfoliostotakeadvantageofthatsituation.Whenamis-pricingpersistswhilsttheawarenessofsuchasituationisbuildingamongstinvestors,itsuggeststherearebarrierstomarketre-pricingbeyondpurelytechnicalorinformation-basedexplanations,includingcognitive,psychological,cultural,andsocialinfluences(Shiller,2005).

Weexploredthisissuethroughtheinterviewprocessbysimplyaskinginstitutionalinvestorsfortheirviewsontheextenttowhichtheythinkthemarketis[currently]pricinginclimatechangerisksandopportunitiesintoassetvaluationsand,ifnot,whentheythinkthattippingpointislikelytocome.

2.2 PerceptionofriskBeyondthevolatilityoffinancialreturns,investors’perceptionofriskisalsoinfluencedbyconsiderationssuchascareerrisk,peerrisk,reputationrisk–orasKeynes’aptlyobservedinthebeautycontextanalogy–thefearofbeingdifferentandbeingwrongforaconsiderableperiodoftime,andlosingmoney:

“Worldlywisdomteachesthatisitisbetterforreputationtofailconventionallythantosucceedunconventionally.”(Keynes,1936)

Inthecontextofclimatechangeandinvestmentdecisions,itisclearthattakingastrongstanceontheissueand/oradaptinginvestmentframeworksthatdifferconsiderablyfromthemarketconsensusviewcouldbringuniquerisksifsuchaviewdoesnottranspireinthenearterm.

Indeed,perceptionofriskhasbeenidentifiedbypsychologistsandbehavioralistsasakeydriverthatimpactsanindividual’swillingnesstotakeactiononclimatechange,bothattheconsciousandunconsciouslevel.VanderLinden(2017)proposedausefulschematicthatattemptstobringthestrandsofriskperceptionresearchtogetherintoaunifiedframeworkthatcanbeusedtomeasureandoperationalizeriskperception.Thisincludedadistinctionbetweensocialandpersonalleveljudgements(willitimpactmorebroadly,versusamIpersonallyatrisk).AsFigure7summarizes,changingbehavior

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bringsperceivedrisksthataremulti-dimensional(Carvalho,2010[vi];Bazerman,2005;Swimetal[vii],vanderLinden,2017[viii]).

Figure7.Perceivedrisksofchangingbehavior

Theseareimportantinsightsforresearchinginvestorbehaviorandclimatechange,asperceptionofriskisakeydriverofinvestorbehavioracrossallinvestmentissues,notonlyclimatechange.Webuiltontheseinsightsanddevelopedanumberofquestionsaspartofthesurveyoninvestorbehaviortogaugetheperceptionofriskinrelationtoclimatechange(boththeperceptionofriskfromtakingaction,andfromnottakingaction).

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2.3CognitivebiasesBehavioralfinance,economicpsychology,andrelateddisciplineshaveidentifiedalargenumberofcognitivebiasesthatmayimpacthowinvestorsmakedecisionsinrealitythatfurtherchallengetheassumptionsoftheEMHandrationality.Many,thoughnotall,haverelevanceforhowinvestorsrespondtomanagingclimatechangerisksandopportunities.Fourbiasesthatwereofparticularinterestandrelevanceforthisresearchprojectonthebehavioralbarrierstoinvestorstakingactiononclimatechangeinclude:

i.Myopia(orshort-termism).Thereisgrowingevidenceandrecognitionacrosstheinvestmentandregulatorycommunitiesthattheshort-termtimehorizonofinvestorsandthemarketmorebroadlyisproblematicwhenaddressingsystemicissuessuchasclimatechangethatspanmultiplehorizons[ix].Thiswillpotentiallyimpactagentsalongtheinvestmentchain,includingassetmanagers,assetowners,CIOs,Boards,andTrusteestotheextentthatshort-termperformanceisgivenprecedenceorpriorityoverlonger-termoutcomesandrisks.

ii.Theheuristicsorrulesofthumbtendencytorelyonanarrowsetofparametersorguidepoststounderpindecisions,asresearchedthroughtheseminalworkofKahnemanandTversky[x]andlatterlyThalerwhocoinedtheterm“choicearchitecture”wherehumansprefersimplicity,havealimitedattentionspanandgooutoftheirwaytoavoidhassles[xi].Thistendencytosimplifydecisionscouldpotentiallythwarteffortstointegrateclimatechangeintoinvestmentprocesses.Thisrelatesalsotonarrowframing,whereinvestorsseektoreducethecomplexityoftheirdecisions,particularlythecaseforBoardsandTrusteeswherethereislimitedtimewhentheBoardcomestogetherandhencemayhavelesscapacitytogodeeperintoissuessuchasclimatechange.

iii.Herding,groupthink,orgravitationtodefensibledecisions,whereinvestorshavethetendencytomimicthebehaviorofothersandactaccordingtothe“rulesofthegame,”whetherconsciouslyorunconsciously.AstheKeynesbeautycontestanalogyposited[xii],thereissafetyinnumbers,ifeveryonegetsitwrongthentheyallgodowntogether,andthereislessreputationalriskthangoingalone.Totheextentthatclimatechangeisnotyet‘conventional’amongstinvestorsintermsofday-to-dayinvestmentdecision-making,itmayfeelriskierforinvestorstotakedecisiveaction(althoughitisincreasinglybecomingpartoftheirrhetoricwhichisanindicatorthatchangeinmarketconventionsandgroupthinkareunderway).Thisappliestoalllayersoftheinvestmentdecisionchain.ForfundmanagersandCIOs,itisaboutpotentialimpactonrelativeperformanceagainstbenchmarksandpotentiallytheirreputation.FortrusteesandBoardsitisfearoflitigationrisk,reputation,and/oraperformancepenalty.

iv.Cognitivedissonanceorinconsistency,wherebyconflictingattitudes,behaviors,andbeliefsproduceafeelingofmentaldiscomfort,whichcanresultinanalterationorinternalshiftinsomeway(Festinger,1957).Inthecontextofclimatechangeandinvestoraction,thisbehaviorishighlyrelevant,particularlyasawarenessofthescaleandmagnitudeofthechallengecontinuestospread.However,theemergenceofatensionbetweenattitudesandbehaviordoesnotautomaticallymeanthatdecisiveactiononclimatechangewillemerge.Indeed,whenafeelingofdiscomfortordissonancearises,therearemultiplewaysforpeopletorespond,such

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aspushingitaway,denyingit,becomingdefensive,orevengoingbackandquestioningorplacingdoubtontheinitialcognitivejudgementthatcausedthefeelingofdiscomfort,ratherthanadmittingtheywerewrong(Schneider,Gruman,&Coutts,2005)[xiii].Thesedynamicsarefurtherexploredinthecontextofinvestoractiononclimatechangeinthisstudy,bothattheindividuallevelandalsothedifferentresponsesthatareemergingacrosstheindustrymorebroadly.

Insightsfromthisresearchwereincorporatedintothedesignofthesurveyandthesemi-structuredinterviewquestionstogaugethepresenceofanyofthesebiasesastheyrelatespecificallytoinvestor’sabilityand/orwillingnesstotakeactiononclimatechange.

2.4Psychological,socialandculturalunderpinningsNotallbehavioralanomaliescanbefullyunderstoodbyconsideringindividualheuristics,rulesofthumb,andothernon-randombiases.Wemustalsoconsiderthesocial,societal,organization,politicaleconomy,andmarket-widecontextsinwhichdecisionsarebeingmadetofullyunderstandinvestorbehavior.InsightsfromeconomicpsychologistssuchasLewis,Webley,andFurnham(1995)andLewis(2001)remindusthatbeliefsandvalues(thatultimatelyinfluencedecision-making)aresharedwithothersandareasocial,notanindividual,phenomenon.Indeed,thiswasanimportantobservationmadebyKeynes,namelythatdecisionstoinvestarelargelygovernedbytheaverageexpectationofthemarket,ratherthanthegenuineexpectationoftheinvestor.Therefore,toreduceandmanageuncertainty,investorsrelyonthemaintenanceofanindustryconventionthatcanbereliedupon,evenifitsustainsunhelpfulbehaviorsandoutcomes.

“Thusinvestmentbecomesreasonably‘safe’fortheindividualinvestorovershortperiods,andhenceoverasuccessionofshortperiodshowevermany,ifhecanfairlyrelyontherebeingnobreakdownintheconventionandonhisthereforehavinganopportunitytorevisehisjudgementandchangehisinvestment,beforetherehasbeentimeformuchtohappen.Investmentwhichare‘fixed’forthecommunityarethusmade‘liquid’fortheindividual.”(Keynes,1936:153)

Withclimatechangenotyeta‘conventional’andwidelyacceptedcoredriverofcompanyorassetvaluations[xiv],creatinganeedforaffirmationfromthewidermarketarounditslegitimacy,potentiallyactingasabarriertowiderintegration(untilwereachthepointofcriticalmass).

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Norgaard(2010)identifiedanumberofpsychologicalbarriersinrespondingtoclimatechangeandclassifiedtheseintermsofidentifiedbarriersversustheunderlyingdrivers.Norgaardfocusesinparticularon“knowingandnotknowing”wheresocietyhastheinformation,butmostpeoplearenotthinkingaboutclimatechangeintheireverydaylives.Anotherwide-rangingreviewofthepsychological,social,andculturalunderpinningsthatlimitclimatechangeactionwascarriedoutbytheAmericanPsychologicalAssociation(Swimetal[xv]),whichidentifiedasequenceofbarriersassummarizedinHighlight2.

Highlight2:Psychological,social,andculturalbarriersthatlimitclimatechangeaction

● Ignoranceanduncertainty–informationalbarriers,lackofawareness,andunderestimationoftherisks.

● Mistrustandreactance–peopledonottrustthemessage,skeptical.

● Denial–beliefthattheycannotdoanythingaboutit,perhapsadeeperfearofmortality.

● Judgmentaldiscounting–beliefthatchangescanbemadeinthefutureorthatitisworseelsewhere.

● Habit–thisishowwedothingsaroundhereorI’vealwaysdoneitthisway.

● Perceivedcontrol–beliefthattheyhavelittlecontrolovertheoutcome,defeatist.

● Perceivedrisks–changingbehaviorbringsrisks(seeperceptionofriskdiscussion).

● Tokenism–takesometokenaction,norealmeaningfulchange.

● Socialcomparisonandnorms–comparetheiractionstoothers(Festinger,1954),peernormsastronginfluence.

● Conflictinggoals–havingmultiplegoalsandvaluesthatareperceivedtobeconflicting.

● Beliefinsolutions–beliefthatotherswilltakecareofit,itwillbeok.Source:http://www.apa.org/science/about/publications/climate-change.aspx

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2.5PowerrelationsTheroleofdifferentagentsalongtheinvestmentmanagementchainwasalsoincorporatedintothisstudy,toconsiderthedifferentpowerrelationsthatcancouldthwartorenableeffortstotakeactiononclimatechange.

Onthequestionofpower,Foucault(1982)[xvi]positedtheneed“tobringtolightpowerrelations,locatetheirposition,andfindouttheirpointofapplication,”inparticularinthecontextofastruggleagainstpower(1982:780).Indeed,inthecontextoftheinstitutionalinvestmentenvironment,thereisnooneuniquerolebutratheramyriadofrolesandfunctions,someofwhicharemoreorlesspowerfulthanothers.Thisprevalenceofpowerinitselfisnotnecessarilysurprisingorofinterest;itmightappearobviousthatsuchdynamicsexistintheinvestmentcommunity.However,thevalueofsuchaninquiryinthecontextofclimatechangeandtheroleofinstitutionalinvestors,drawingfromFoucault,istobetterunderstandthelayersofinfluencethatcandeterminehowdifferenttypesofinvestorsinteractwitheachother,theirbehavior,thenarrativeandscriptthattheyfollowintheirroleorfunction,andindeed,thestrugglesthatmightbesurfacinginthechallengeagainstexistingpowerdynamicsandthestatusquo.

Inordertobetterunderstandthecrucialroleofpowerdynamicsinreinforcingthestatusquoandcausingperhapsunintendedbehaviorsandoutcomes,theresearchsetouttoexaminethedifferentperspectivesandinter-relationshipsbetweenthatholdmoredirect‘power’inoverinvestmentdecisionscomparedtotheagentsthathavemoreindirectinfluence.ThefocusinparticularinthisstudyisonthebehaviorandinteractionofTrustees,Boardmembers,ChiefInvestmentOfficers(CIOs)/leadinvestmentdecision-makers,andfundmanagers(actingforandonbehalfofassetowners)withESGspecialists,consultants,advisers,data,andotherserviceproviders.

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Indesigningthesurveyand1:1interviewprocess,itisimportanttohighlightthatabalanceoffundsthatmightbeconsideredtobemore‘leading’andthosethatareatanearlierstageintheirevolutionwereinvitedtoparticipateintheresearchonananonymousbasis.Perhapsunsurprisingly,wefoundthatthelessprogressedfundswerelesswillingtoengageintheresearchprocess.Itisanimportantfindinginitselfthatfundsthatarelessprogressedontheirjourneyarealsomoreresistanttoexploringthebehavioraldimensionsthatmightbeimpactingontheiractionsattheindividualand/ororganizationallevel.Thisinevitablyintroducessomedegreeofbiasintothesampleandresearchfindingsthatwemadeeffortstoobserveandhighlightthroughoutoutanalysis

3 Survey design and findings BuildingontheinsightsoftheliteratureassetoutinSection2aswellasdesigntechniques,asurveywasdevelopedtogaugeandbetterunderstandtheprevalenceofsomeofthebehavioralbarriersamongstinstitutionalinvestorswhenitcomestotakingactiononclimatechange(refertoAnnexforsurveyquestions).[xvii]

Wedistributedtheonlinesurveytoinstitutionalinvestorsinternationallythroughoursocialmediaandindustrynetworksandreceived89responsesintotal,spreadacrosssixregionsandalllayersoftheinvestmentmanagementchainintermsoffunction(analysts,strategists,portfoliomanagers,CIOs,CEOs,Boardmembers,trustees,departmentheads,ESGspecialists,advisors,researchers,dataproviders),includingassetowners(29%),assetmanagers(24%),investmentconsultants(9%),investmentbanks(2%),serviceproviders(15%),independentadvisors(10%),andother(11%).Two-thirdsofrespondentsweremale,onethirdfemale,withthemedianageinthe35-54range.

Thesurveyresponseswereanalyzedintwophases,firsttheaggregate(total)samplesurveyfindingswereexamined(see3.1‘Overallfindings’).Second,thedatawasexaminedatthedisaggregatedlevel,lookingfordifferencesacrosstwocohortsasawaytogainfurtherinsightintothepowerrelationswithintheinvestmentagents(see3.2‘Powerrelationsfindings’).

Inadditiontotheaggregate,totalsampleanalysis,thesamplewasdividedintoGroup1‘powerful,direct’andGroup2‘lesspowerful,indirect’categoriestotestfordifferencesthatmightemergeintermsoftheroleandfunctionswithintheinvestmentcommunity.Thedefinitionofpowerisbasedonhow

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muchofaninfluenceanagenthasdirectlyoninvestmentdecisions(beingdirectlyresponsibleforinvestmentstrategy,capitalallocationdecisions,portfoliomanagementdecisions,orintermsofexecutionandvaluationofassets)versusthedegreeofinfluenceanagentindirectlyhasoninvestmentdecisions(eitherasasubjectspecialist,advisor,researcher,wheretheymayinfluencedecisionsandoutcomes,butarenotdirectlyresponsibleformakingthem).

3.1AggregatesurveyfindingsAttheaggregatelevel,someofthekeyfindingsfromthesurveyaresummarizedinFigure8,mappedalongsideeachofthecognitiveandpsychologicalunderpinnings.Afterthefirstprofile-basedquestions,thesurveystartedoffbygauginggeneralbeliefsaboutclimatechange,beforemovingontoexaminemorespecificconsiderationstorevealanydiscrepanciesand/ordeeperinsightsintothesebeliefsintermsofhowtheymightimpactonbehaviorandperceptionofrisk.

Figure8.Aggregatesurveyfindings

SURVEY KEYFINDINGS COGNITIVEBARRIER(S)

PSYCHOLOGICALUNDERPINNING(S)

QUESTIONREFERENCE

Beliefs Thereisgeneralacknowledgmentofclimatechangeasasystemicrisk,butattheday-to-daylevel,thereisadegreeofseparationfromtheissueintermsofwhatthatmeansinpractice.

Myopia,cognitivedissonance

Uncertainty,denial,judgmentaldiscounting,perceivedcontrol

Question6,3

PerceivedDifficulty

Thereisgrowingeffortandmomentuminsomeareas(suchasengagementwithcompaniesonclimatechange),yetitisstill“notreallyincorporatedintoinvestmentanalysis.”

Narrowframing,heuristics,lossaversion

Habit,conflictinggoals

Question7,3

PerceivedBehaviorofPeers

Mostrespondentsdonotthinktheirpeersaretakingstrongactiononthisissue,thereisalackofmotivationtoact.

Herding,lossaversion

Tokenismandreboundeffect,socialcomparison,norms,andconformity

Question8,3

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PerceivedDifficultyofSpecificActions

Thereisadegreeofresistancetochangetoexistingframeworks,ittakestime,energy,andmotivationtoseeitthrough,whichmaynotbepresentattheindividualleveloracrossorganizations.

Heuristicsandrulesofthumb,anchoring

Habit,perceivedriskoftakingaction,conflictinggoals,mistrust,andreactance

Question9,3

PerceivedChallengesIncorporatingintoInvestmentDecisions

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

Statusquobias,cognitivedissonance

Habit,socialcomparison,normsandconformity

Question10,3

PerceptionofRiskofTakingAction

Whenitcomestotakingactiontotrytochange“theother”(externalfundmanagersorcompanies),thenitisconsideredtobeeasier.Whenitcomestochangingtheirownpractices(i.e.valuationframeworksorassetallocationmodels),thenthatisconsideredtobemuchmoredifficult.

Statusquobias,narrowframing

Denial,perceivedcontrol,perceivedriskoftakingaction,conflictinggoals

Question11,3

PerceptionofRiskofNOTTakingAction

Halftherespondentsbelievethatfailuretoactonclimatechangewouldnotresultinalessdiversifiedportfolio.

Overconfidenceeffect

Judgmentaldiscounting,denial,beliefinsolutions

Question12,3

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3.1.1BeliefsSurveyQuestion6wasdesignedtogaugetheoverallbeliefswithrespecttoclimatechangeanditsrelativepriorityinthecontextofportfoliomanagementdecisions.

● Therewasgeneralagreementthatclimatechangeposesa“seriousriskthatneedstobeaddressedurgently,”with64%stronglyagreeingand27%agreeingwiththisstatement.Only1%stronglydisagreed.

● Moreover,72%ofrespondentsstronglyagreethat“takingactionnowwillreducefuturecosts,”withonly2%stronglydisagreeingwiththisstatement.

● Therewasgeneralagreementalsothatinvestorscandosomethingaboutthis,with90%ofrespondentseitherstronglyagreeingoragreeingthatclimatechange“providesnewopportunitiesforinvestors.”

● Nearly90%ofrespondentsdisagreedorstronglydisagreedwiththestatementthatclimatechange“istoofarintothefuturetoassess”orthat“thereislittlethatinvestorscanrealisticallydoabouttheissue.”

● Theresponsetothestatementthat“therearemorepressingissuestoaddress”thanclimatechangegeneratedamoremixedview,witharoundathirdneitheragreeingnordisagreeingwiththisstatement.

Onthefaceofit,theseresultsareveryfavorableandindicativeofsupportforclimatechangeaction.Thiscouldbeduetoaselectionbiastotherespondents(wheretherespondentsthatcompletedthesurveyonbalancealsoheldamoresupportiveviewofclimatechange).Itcouldalsobethefirstinsightintorevealingapossiblegapbetweenbeliefsandbehaviorsandtheemergenceofcognitivedissonancewhichwefurtherexamine.

Whenweexaminedtheopen-endedresponsestoQuestion6,weobservedlayersofcomplexitytoexplaintheresponsesthatsuggestedthebeliefsmightnotbeasstraightforwardasinitiallysuggested.Forexample,therewasmentionofa“tension”thatexistedinactingonlong-term,chronicissuessuchasclimatechange.Whileitwasseenasa“topfive”issue,byanother,therearemultipleand“equallypressing”issuesthatalsoneedtobeaddressed.Oneevenwentasfartosaythat:

“…Fromtheperspectiveofrunningourpensionfundonaday-to-daybasis,itcanseemlikethisissuecanwait.”

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3.1.2Perceiveddifficulty SurveyQuestion7focusedontheperceivedlevelofdifficultyassociatedwithincorporatingclimatechangeintoinvestmentframeworks,togaininsightintotherolethatmentalmodels,heuristics,andrulesofthumbplayintakingactiononclimatechange.

● Themajorityofrespondents(45%)reportedlyfeltthat“incorporatingclimatechangeintoinvestmentframeworks”waseitherdifficultorverydifficult.Aroundathirdfeltthatitwasneithereasynordifficult,withonly3%thinkingitwasveryeasy.

● So,whileinthepreviousquestionitseemedthatthemajorityofrespondentsfeltthatclimatechangecouldbeactedupon,thatitpresentedbothopportunitiesandrisksthatcouldbemanagedtoday,whentakenfurther,itseemsthatpeoplethinkthisisquitedifficulttodo(albeitnotimpossible).

Interestingly,theresponsestotheopen-endedcomponentofthisquestionrevealedanarrayofperspectives.Weareseeingmuchmorediversityinthinkingalreadyfromtheprecedingquestion.Forexample,whereexternaldriverswereseentobethemostimportantdifficultywithtakingactionbysome(citinglackofregulations,information,data,tools),otherspointedtointernaldrivers,observingthatitis“hard”tochangeexistingframeworksinlargeorganizationsandthatthe:

“…toolsexist,motivationtendstobetheprimaryobstacle.”

Anotherrespondentobservedthat:

“…existingframeworkshaveoftendevelopedovertime,andsomayrequireretooling,whichcanbelaborintensive.Equally,adoptingasingleapproachacrosssectorscanbehard,particularlyinlargeorganizations.”

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3.1.3PerceivedbehaviorofpeersSurveyQuestion8consideredtheextenttowhichinvestorsfeltthattheirpeersweretakingactiononclimatechange,togaininsightintothebehavioraltendencytowardsherdingandtocompareoneselftoothers,tofeelmorecomfortabletakingactionthatisperceivedtobeconventional.

● Themajorityofrespondents(65%)feltthat“climatechangewasbeingaddressedbyotherinvestors,”includingpeers,‘toaverylittle’or‘somewhat’extent.Only1%thoughtthatiswasbeingaddressedtoa‘great’extent.

● Thislackofpeerpressureorsensethatotherinvestorsarenotreallytakingstrongactiononclimatechangewillalsounderminethewillingnessandmotivationtotakeaction.

Indeed,someoftheopen-endedresponsespointedoutthatwhilethereisgrowingeffortandmomentumacrosstheindustryandamongsttheirpeersaroundsomeapproaches(suchasengagementwithcompanies),manyfeltthatclimatechangeis:

“…notreallyincorporatedintoinvestmentanalysis.”

Whilesomenotedthatthereismoreattentionandtalkaboutclimatechange,thereisstill:

“…notalotofinternalcapabilitiesthatwouldamounttoseriousaction.”

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3.1.4PerceiveddifficultyofspecificactionsBuildingonQuestion7,Question9madeeffortstogofurthertogaugeattitudestowardsspecificactionsthatcanbetakenwithrespecttoclimatechange.

● Themostrevealinginsightfromthisquestionwasthatsomeactivitieswereconsideredbymost(morethan70%ofrespondents)tobeeitherveryeasyoreasy,namelyengagingwithexternalmanagers,engagingwithcompanies,andinvestinginlowcarbonopportunities.

● Ontheotherendofthespectrum,integratingclimatechangeintovaluations,undertakingscenarioanalysis,andreviewingassetallocationassumptionswereidentifiedasthemostdifficultorverydifficultactionstotakebymorethan60%ofrespondents.

Thissuggeststhatwhenitcomestotakingactiontotrytochange“theother”(externalfundmanagersorcompanies),thenitisconsideredtobeeasier.Whenitcomestochangingthemselves(i.e.theirvaluationframeworksorassetallocationmodels),thenthatisconsideredtobemuchmoredifficult.Forexample,onerespondentnotedthat:

“…it iseasy to incorporatebutharder toactually implementclimatechangestrategiesintoinvestmentframeworks.”

Anotherobservedthedifferencelayersofintegration:

“I think [climate change] is addressed by engagement but not really incorporated ininvestmentanalysis.”

Withanothersuggestingthatcollectiveactionispreferable:

“…it isacomplexchallengeandrequiresabroadrangeof responses….it isacollectiveactionproblemsosuccessisnotwithinthecontrolofanyindividualfund.”

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3.1.5PerceivedchallengeswithincorporatingintoinvestmentdecisionsSurveyQuestion10providedrespondentswiththeopportunitytoself-identifywithalistofpotentialchallengesthatincludebothexternalandinternaldimensions.Itwasdesignedtogainfurtherinsightintothewayinvestorsthinkaboutclimatechangeandwhatmightbeimpactingtheirabilityand/orwillingnesstointegrateitintoinvestmentdecisions.

● Thefactorsthatwereidentifiedbyrespondentsasbeingthemostimportantchallengesthattheyfacedwerethreefold,namely:1)“lackofcomparabledata”(with60%ofrespondentspointingtothisasbeinganimportantorveryimportantchallenge);2)“thelackofinternalbuy-in”withintheirorganization(morethan55%identifyingthisasbeinganimportantorveryimportantfactor);andthe“highdegreeofcomplexity”thatmanagingclimatechangeinvolves(morethan50%rankedasimportantorveryimportant).

Theopen-endedresponsesalsorevealedsomecommonalitiesthatpointedtothelackofindustrynorms/conventionsthatincorporateclimatechangeimpacts.Forexample,onerespondentstatedthat:

“…lackofcomparabledataisnotasmuchofachallengeaslackofanindustrystandard.”

Withothersstatingthat:

“…thegreatestchallengeisabehavioralone,challengingthestatusquoandvestedinterests.”

Withsuchinsightsandawarenessoftheinnerdriversandbehavioralobstaclesapparentlyprevalentfromwithintheinvestmentcommunity,itissomewhatperplexingthattheseissueshavenotbeenmoreexplicitlyresearchedandfocusedonaspartofscalingupinvestoractiononclimatechange.Itmightnotbeasstraightforward(orperhapsascommerciallyappealing)asbuildingnewtoolsanddatabases,butitisclearlyessential.

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3.1.6PerceptionofriskoftakingactionSurveyQuestion11setoutanumberofpossibleresponsestogaugeinvestors’perceived“risksassociatedwithintegratingclimate-relatedimpactsintoinvestmentdecisions.”

● Thehighestratedrisksassociatedwithintegratingclimatechangeintoinvestmentdecisionsincluded:1)toocomplextoevaluate(30%ofrespondents);2)timeandresourceintensive(32%ofrespondents);3)notwellentrenchedacrosstheindustry(28%ofrespondents);and4)hardtodefendifitgoeswrong(27%ofrespondents).

● Ontheotherendofthespectrum,thepotentialriskofbreachingfiduciarydutywasratedasnotariskoralowriskbymorethan70%ofrespondents,suggestingthatthisisnotactingasaperceivedbarriertoaction.Gettingfiredand/oralowerbonuswasalsoquitelowonthelevelofconcern,with67%ofrespondentsputtingthisasaveryloworlowriskintermsoftakingactiononclimatechange.

Onerespondentdidhighlightthepotentialimpactofshorttimehorizonsandtheimpactthatcanhaveonbehavior,notingthat:

“TheissueIbelieveisthatFundsaremeasuredoverarelativeshortperiod.Theimpactoflegislativechangeisoftennotimmediate.Therefore,Fundscaninvestandexistbeforevalueisaffected.”

Anotherhighlightedthepotentialimpactonperformanceandtimehorizon,notingthat:

“Bythetimeperformanceriskismaterialandvisibletoinvestorsitmightbetoolateforusasaglobalsocietytostabilizetheclimate.”

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3.1.7PerceptionofriskofNOTtakingactionIncontrasttothepreviousquestion,surveyQuestion12setoutanumberofpossibleresponsestogaugeinvestors’perceived“risksassociatedwithNOTintegratingclimate-relatedimpactsintoinvestmentdecisions.”

● Interestingly,therewasmoredispersionintheresponsestothisquestionthaninthepreviousone,indicatingthatwhenitcomestonottakingaction,thereislessconsensusonwhatthatmeans(comparedtotherisksofactuallytakingaction).

● Therewerefiverisksthatstoodoutasposingmoreconcernamongstthemajorityofrespondentsthanothersintermsofnottakingactiononclimatechange,thesebeing:1)reputationriskofnotacting(50%ofrespondents);2)losingleadershipstatus(52%ofrespondents);3)missingoutonnewopportunities(50%ofrespondents);4)highersystem-widerisks(54%ofrespondents);and5)weaksignalsforcompaniesandgovernmentstoact(60%ofrespondents).

Indeed,halftherespondentsdidnotthinkthatfailuretoactonclimatechangewouldresultinalessdiversifiedportfolio(50%rankingthisasnotariskoraverylowrisk).Clearlythereisanelementofconsistencyonthispointthatneedstobefurtherexplored,asthemajorityofrespondentsreportedlysawclimatechangeasamajorsystemicriskthatneededtobemanaged(Question6),yetatthesametimehalfoftherespondentsthinkthatthiswillnotimpactportfoliodiversification.Thisappearstosuggestcognitivedissonanceispresent,leadingtodenialofthepotentialportfoliorisksofnottakingaction.

Thiscouldbeunderpinnedbyconfirmationbias,whereexistingmodelsandframeworksthatareusedtoevaluateportfoliodiversificationarenotreviewedinlightofclimatechange.Rather,themoreconvenientconclusion(thatconfirmstherelianceoncurrentframeworks)isthatportfolioresiliencewillnotbeimpacted.

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3.1.8Open-endedresponsesAttheendofthesurvey,aspacewasprovidedforopen-endedcommentsorinsightsonthistopicmoregenerally,generatingahighnumberofentriesbyrespondents(26ofthe89respondentsofferedadditionalcomments);whichprovidedausefulinsightsforouranalysisandguidanceaswepreparedfortheinterviewstageoftheresearch.

● Onerespondentnotedthat“ahugepartoftheproblemischangingmindsets.”Anotherstatedthat“cultureiscritical”andthatthe“cultureoftheinvestmentcommunity”needstoevolve.Onerespondentclaimedweareinthemidstofa“moralcrisis.”

○ Thisconfirmsoureffortsinthisprojecttofocusonbehaviorsandtheirdrivers,includingdominantmindsets,values,andculture.

● Otherrespondentspointtoresourcingissuesinternally,where“timeandresourceshortagesareoftenquiteacute.”

○ Thisreaffirmsthesurveyfindingsthatinternalbuy-inattheorganization-widelevelisneededtohelpprioritizetheissueandalsoovercometheinternalbarriersthatmayslowdownaction.

● Anotherrespondentnotedthatthemainproblemwasthat“Fundsaremeasuredoverarelativelyshortperiod…Fundscaninvestandexitbeforevalueisaffected.”Anothernotedthatbythetimeclimateriskis“visibletoinvestors,”itmightbe“toolateforusasaglobalsocietytostabilizetheclimate.”

○ Thenotionoftragedyofthehorizonsemergedmostlystronglyintheopen-endedresponsesandthroughouttheinterviewprocess.Interestingly,short-termismisnotsomethingthattherespondentsfeltthattheywerepersonallycontributingto.Itappearedtobeaproblemwith“themarket”or“others,”ratherthanthemselves.

● Otherrespondentshighlightedtheimportanceofpolicyandregulationstospuraction,withonestatingthat“itshouldbemainlyregulationledintheend”andanothernotingthat“nothinghasdrivenchangequiteliketheregulatorincorporatingclimatechangeintonewrequirementsintheUK.”Anothernotedthat“withoutapriceoncarbon,therisksarehardtoassessandprogressislikelytoremaintooslow.”

○ Thisframingoftheissueismoretypicalofhowtheinvestmentcommunitytalksaboutclimatechangebarrierstoaction.Itreliesonchangetothe“external”conditionsratherthanto“internal”processesorwaysofthinking.Ideally,regulatorychangethatalsoseekstoreflectthedriversofbehavior,culture,andmindsetswouldhelptobringthe‘internal’cognitiveprocessescloserinalignmentwiththe‘external’conditionstosupportgreaterclimateactionamongstinvestors.

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3.2PowerrelationsfindingsInadditiontotheoverallfindings,wedividedupthesurveyrespondentsintoGroup1‘powerful,direct’andGroup2‘lesspowerful,indirect’categoriestolookforanydifferencesthatmightemergeintermsoftherolesandfunctionswithintheinvestmentcommunity.Theaimwastofurtherexploretheemergenceofthetensionthatweobservedatthetotalsamplelevelandthepotentialrolethatcognitivedissonancemightplayinexplainingandunderstandingourfindings.

Forthepurposesofourresearch,thedefinitionofpowerisbasedonhowmuchinfluenceanagenthasdirectlyoninvestmentdecisions(beingdirectlyresponsibleforinvestmentstrategy,capitalallocationdecisions,portfoliomanagementdecisions,orintermsofexecutionandvaluationofassets)versusthedegreeofinfluenceanagentindirectlyhasoninvestmentdecisions(eitherasasubjectspecialist,advisor,orresearcher,wheretheymayinfluencedecisionsandoutcomes,butarenotdirectlyresponsibleformakingthem).

● Group1–Powerful,direct–definedinthisstudytoincludeChiefInvestmentOfficers,ChiefExecutiveOfficers,assetallocationstrategists,boardmembers,trustees,generalmanagerofinvestments,headsofdivision/department,portfoliomanagers,investmentanalysts.

○ Group1samplesizewas42respondents,representing47%ofthetotalsamplesizeof89.

● Group2–Lesspowerful,Indirect–definedinthisstudytoincludeESG/sustainabilityspecialists,consultants,specialistadvisors,independentresearchers,data/analyticsproviders,industryassociations,ornewsserviceproviders.

○ Group2samplesizewas47respondents,representing52%ofthetotalsamplesizeof89.

Weacknowledgethatthesedefinitionsmightbechallengedbysome.Forexample,ifweweretoconducttheanalysisattheorganizationlevelandconsidertheindividualgovernancemodelofeachfund,the‘lesspowerful’mightbemoredirectlyinfluentialoninvestmentdecisionsthanwehaveassumed(consultantsandESGspecialists,forexample).Nevertheless,basedonourexperienceworkinginsideinvestmentorganizations,advisingthemontheseissuesandinteractingwithawiderangeoforganizationsonthistopicforanumberofyears,weconcludedthatthesecategorizationsattheindustrylevelwerereasonable.

Figure9summarizesthekeyfindingsbasedonthedisaggregatedanalysisofGroup1versusGroup2behaviorswithrespecttoclimatechange,alongwithasummaryoftheevidence.

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Figure9.Powerrelationsfindings

OVERALLFINDINGS EVIDENCE

Powerfulagentrespondentsdemonstratedahighertendencytowardsbehavioralbiasesthatlimitclimateactioncomparedtolesspowerfulagents.

Group1scoredlowerthanGroup2overallandalsoshowedahigherdispersioninviewsthanGroup2.ThisoveralldifferencebetweenGroup1and2wasfoundtobestatisticallysignificant.

Powerfulagentrespondentsarepredominantlymale.

Group1hasamuchhigherproportionofmaletofemalecomparedtoGroup2,whichwasmoreevenlysplitbygender.

Malerespondentsdemonstratedahighertendencytowardsbehavioralbiasesthatlimitclimateactioncomparedtofemales.

Genderdifferenceswerefoundtobestatisticallysignificant,withfemaleshavingahigherscorethanmales.

Powerfulagentrespondentstendedtobe(onaverage)olderthanlesspowerfulagents.

Group1hadahigherproportionofrespondentsaged55yearsandoverthanGroup2respondents,althoughthedifferencewasnotfoundtobestatisticallysignificant.

Olderrespondentsdemonstratedahighertendencytowardsbehavioralbiasesthatlimitclimateactioncomparedtoyoungerrespondents.

Thoseaged55yearsorlesswerefoundtoscoremorehighlythanthose55yearsandoveronanumberofareas.

TheagedifferencewasfoundtobestatisticallysignificantonQuestion7(existinginvestmentframeworks),whereolderrespondentsdemonstratedlesswillingnesstochangeandadaptframeworkscomparedtoyoungerrespondents.

Furthermore,Question12foundastatisticallysignificantdifferencebetweenagegroupswhereyoungerrespondentshadastrongerviewthatNOTincorporatingclimatechangeintoinvestmentdecisionsposedasignificantinvestmentrisk.

Powerfulagentrespondentsfindintegratingclimatechangeintovaluationsmorechallengingthanlesspowerfulagents.

Group1believesthatintegratingclimatechangeintovaluationswasmoredifficultcomparedtothebeliefsheldbyGroup2.

ResponsetoQuestion9onintegratingclimatechangeintovaluationsfoundastatisticallysignificantdifferenceinresponsesbetweenGroup1andGroup2,withGroup1scoringlowerthanGroup2.

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Powerfulagentrespondentsfeelmoreconstrainedbyexistinginvestmentframeworksthanlesspowerfulagents.

Group1wasfoundtobemoreinfluenced(andconstrained)byheuristics/existingindustrypracticeandexistingframeworksthanGroup2.

ResponsetoQuestion10onclimatechangenotbeingpartofstandardindustrypracticefoundastatisticallysignificantdifferenceinresponsesbetweenGroup1andGroup2,withGroup1scoringlowerthanGroup2.

Powerfulagentrespondentsfeelmoreconstrainedbyfiduciarydutythanlesspowerfulagents.

Group1wasfoundtobelessconvincedthatclimatechangeactioniscompatiblewithfiduciarydutythanGroup2.

ResponsetoQuestion11onclimatechangeintegrationbeingcompatiblewithfiduciarydutyfoundastatisticallysignificantdifferenceinresponsesbetweenGroup1andGroup2,withGroup1scoringlowerthanGroup2

Powerfulagentrespondentshaveahighertendencytoconformtoindustrynorms(andherding)thanlesspowerfulagents.

Group1hadahighertendencytowardsherding(preferringthatwhichiswellentrenched)thanGroup2.

ResponsetoQuestion11onclimatechangenotbeingwellentrenchedacrosstheindustryfoundastatisticallysignificantdifferenceinresponsesbetweenGroup1andGroup2,withGroup1scoringlowerthanGroup2.

Insummingupthepowerrelationsanalysis,thefindingssuggestthatthereisadifferencebetweenthoseagentsthathavemoredirectresponsibilityforinvestmentdecisions(definedinthisstudyas‘powerful’agents),comparedtothosethathavemoreindirectinfluence(definedas‘lesspowerful’agents).Thisdifferencewasnotonlyfoundtobestatisticallysignificantatthetotalsamplelevel,butitwasalsosignificantwhensomeoftheindividualbiasesanddriverswereexamined,withGroup1scoringlowerthanGroup2.

TheresultsalsosuggestthatGroup1respondentsweremorelikelytofinditdifficulttointegrateclimatechangeintovaluations,toseehowitfitsintoexistingframeworksandinvestmentpractices,anditscompatibilitywithfiduciaryduty,comparedtoGroup2respondentswhoscoredmorehighlyacrossallofthesedimensions(wherethedifferenceswerealsofoundtobestatisticallysignificant).

AcloserexaminationofthesurveyrespondentsthatmadeupGroup1andGroup2showsthatthereisadominanceofmaleversusfemaleinGroup1,andanaverageagethatisalsoolderinGroup1thanGroup2.Thishaspotentialimplicationsnotonlyforcommunicationandmessagingtodifferentinvestmentagents,butalsoforgovernanceanddiversityinsideinvestmentorganizationsthemselvesatalllayersofthedecision-makingprocesses.

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3.3CognitivedissonanceThedisaggregatedanalysisofthesurveyresponsesalsopointstoevidenceofagrowingdislocationwithintheinvestmentcommunity,suggestingthatthereisafragmentationofcultureemergingwhichcouldpotentiallyhelptodestabilizethestatusquoandallownewperspectivestofilterthroughthesystem.

Toanalyzethisfragmentationwecategorizedthesurveyresponsesintermsof:i)Divergencewithintheinvestmentcommunity;ii)Denialofaninternalinconsistency;iii)Defensivenesstojustifytheinternalinconsistency;iv)Decisivenessamongstsome,totakingstrongactiononclimatechange(Figure10).

Figure10:Cognitivedissonanceprocessesofinvestorswithrespecttoclimatechange

I.Divergence–Viewswithintheinvestmentcommunityonwhatinvestoractionsshouldbetakennowinresponsetoclimatechangeareincreasinglydivergent.

Whilewefoundevidenceofagenerallyacceptedawarenessandlevelofconcernaboutclimatechangeatthesystem-widelevelamongstinvestors,wealsodiscoveredadivergenceinopinionsaboutwhatthatmeansinpracticeattheindividuallevel.Thereisasub-setofinvestors(Group2)thathavemorestronglyheldbeliefsandconvictionthanothers,whoareincreasinglyfrustratedatthelevelofinaction(inthiscase,frustrationatGroup1).

Thereisatensionbetween“themandus,”withthe“them”beingthepoweragents(Group1)andthe“us”beingthelesspowerfulbuthighlymotivated(Group2).

Someoftheopen-endedresponsesfromGroup2providedbelowhighlightthisemergingtension.Forexample,somecommentsthatweremadeaboutseniorinvestorsinsideorganizationswere:

“…toomany excuses, a lot of talk but very little action. It should bemainly regulation led intheend.”

“…forthemostpart[they]aresimplypayinglipservicetoit…”

“…thecleveryoungTurksshouldoustthelazyoldlions...”

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Ii. Defensiveness–Group1investorsappeartobelesswillingtotakestrongactionnow.Theyrelymoreheavilyonperceivedcomplexitytojustifytheirpositiontothemselvesandtoothers.

Commentssuchas“dealingwiththehereandnow”and“managingasbestwecanwithTheinformationwehave”werethetypeofjustificationsthattheseinvestorsgavefortheirmoremutedresponse.

Onerespondentnotedthat(underlineaddedforemphasis):

“…canrealisticallydoisnotthesameaswillrealisticallydo…”

Thissuggestsalevelofawarenessoftheapparentgapbetweenattitudesandbehaviors,describedaspotentialactionandactualaction.Whileactionmightbepossible,thereareallsortsofreasonswhyismightnotbe‘realistic’togofurther,

Iii.Denial–AlthoughGroup1acknowledgethatclimatechangeexistsandrevealedtheirconcernatthesystem-widelevel,theydemonstratedadegreeofdenialanddisconnectionfromtheissueintermsofitsdirectrelevancetotheirdayjob.

Thiswasrevealedinthesurveyanalysisonperceptionofriskfromtakingaction(ornot)onclimatechange,wherewefoundthatGroup1tendedtoseelowerrisksinnottakingactiononclimatechangethanGroup2.Inparticular,therewasafairlystrongviewexpressedamongstthisgroupofinvestorsthatnottakingactionwouldnotadverselyimpactportfolioresilienceand/ordiversification.

AsoneGroup1respondentnoted:

“Thisisatopfiveissue,buttheplanfacesmultipleequallypressingissues.”

Thebeliefthatclimatechangeisanissuethatsitsalongsideothers,ratherthanrepresentingasystemicriskofmajorproportions,reflectsanelementofdenialoftheevidenceandalsoadenialoftheirownattitudewherealmostallrespondentshighlighteditasariskthatneededtobemanagedwithurgency(atthesystem-widelevel).

Thistendencytodisconnectfromclimatechangeattheindividual(firmororganization)levelconfirmsexistingresearchthatpointstoahigherdisconnectionamongstthosewhofeeltheyareafewstepsremovedfromthebruntoftheactualoutcomesofclimatechangeonthempersonally(Norgaard,2010).Inthecaseofourstudy,thisdisconnectmanifestsintermsofperceivedthreat(ornot)toportfolioresilienceandfinancialperformance.

iv.Decisiveness–Group2investorstendedtohaveverystrongviewsinfavorofimmediateandstrongclimateaction.

Group2werefoundtohavestrongerviewsonclimatechange,werelesspronetocognitivebiasesandpsychologicalbarriersthatthwartedtheirefforts,andweremorewillingtotakeactionnow.Theydemonstratedastrongmotivationtoactnow,referredlesstotools,data,andinformationlimitations,andmoreaboutconviction,consistency,trust,andbuildingstrongrelationshipstosupportandunderpintheirefforts.

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Thisgrouphasovercomethecognitivedissonanceandcomeouttheothersideinternallywithacleardrivetotakeaction.Thechallengeforthisgroupappearstobemorerelatedtomanagingasenseoffrustrationthattheyareinsiderstotheinvestmentindustryandtheyhavearoletoplay,buttheireffortsarebeingunderminedbytheactions(orratherinaction)ofothers.

OtherrespondentsfromGroup2notedthat:

“Incorporation[ofclimatechange]shouldbeviewedasessentialandrequirecommitmenttothenecessarycapacitybuilding.”

“Institutionshaveotherprioritieswhereunhappilythemeansjustifyanywaytoreachthem.”

“Toomanyinfluentialassetownersandassetmanagerssitonthefencewithenormouscapitaldestructionlooming.”

“Iseeclimatechangeasposingglobalcatastrophicdangers…whileinstitutionalinvestorshaveattheirdisposalsubstantialpowertoleadvitalchangethroughconcertedpoliticalandfinancialengagement,thispowermustbemorefullyeffectuated.”

EvidentlyGroup2respondentsspeakaboutclimatechangeinadecisiveway,thereislittleuncertaintyastohowbigtheissueorchallengeis,andalsoacleardemonstrationofemotionandfrustrationatthelackofaction.The“themandus”andwhy“they”shouldbedoingmoreisalsoself-evidentintermsofhowtheydescribetheissue.Thenotionofpowerinthelaststatementalsolendsweighttoouranalysistobetterunderstandtheroleofthatdynamicwithintheinstitutionalinvestorcontext.

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4 Interview design and findings

4.1InterviewdesignThesecondresearchmethodfortheprojectwastocarryoutaseriesofsemi-structured1:1interviewswithindividualsinsideassetownerorganizationsthatrepresentGroup1(powerfulagents)asdefinedinthisstudy.Theaimoftheinterviewswastofollowuponthesurveyfindingsthatindicatedthebehavioralbarrierstotakingactiononclimatechangeisstrongeramongstthisgroup,comparedtoGroup2(lesspowerfulagents).

Aseriesofquestionsweredevelopedtoguidetheinterviewprocess,althoughtheapproachtakenwasverymuchasemi-structuredconversationasitwasimportanttocreateanatmosphereofopennessandtrust,tobetterunderstandtheissuesfromtheperspectiveoftheintervieweesthemselvesonthelinksbetweenrealinvestordriversandtheunderlyingbarrierstoclimateaction.Indeed,thequestionswerenotfollowedrigidlyastheintervieweesallhaddifferentperspectivesonclimatechangeanditsimplicationsforinvestmentdecisions,sothisrequiredjudgementastohowbesttoaskandprioritizethequestionsinordertobetterunderstandtheirperspective.

ToencouragetheGroup1individualstoparticipateintheinterviewprocess,aprojectsummarywaspreparedandsentaspartoftheinvitation.Existingrelationshipswiththeindividualsinsidetheseorganizationswasimportantandtherewascertainlysomeselectionbiasintheinterviewlistaswediscoveredthatindividualsinsideorganizationsthatwereless‘progressed’intheirthinkingandactionsonclimatechangeweremorereluctanttoparticipateintheresearch.

Therealityisthatexistingleadersarefarmorepreparedtotalkaboutthebarriers(andhowtheyovercamethemoraremanagingthempresently)thanlessprogressedinvestorswhocouldfeelmorethreatenedoruncomfortablewithdiscussingthechallengesoftakingactiononclimatechange.Morebroadly,thisisachallengewithanybehavioralresearchundertakenon‘realworld’peopleversusexperimentalormoretheoreticalapproachesintheacademiccontext.

Withthissamplebiasinmind,thestrategythatwasadoptedthroughouttheinterviewprocesswasoneofunderstandingtheperspectiveoftheinterviewees,thechallengesthattheyhavewithrespecttotakingactiononclimatechange,howtheymanageandrespondtothese,andhowtheyseethingsevolvinggoingforward.Theseinsightsfromseniorexecutivesinsideassetownerorganizationsarevaluabletonotonlyunderstandwhatstrategiestheyemployedtoovercomesomeofthechallengesthattheyencountered,butalsotosharetheseinsightswithotherorganizationsthatarelessprogressedonthejourney.Inthisway,theherdingtendencythatwasobservedatthesurveylevelcouldbeaforceforchange,wheretheleadingfundscanhelptopavethewayforotherinvestorstofollowsuitandevolvetheirowninternalprocesseswithrespecttoclimatechange.Thepowerofthepackinchallenginggroupthinkandindustrynormsiskey[xviii].

Againstthatbackdrop,atotalofeightteleconferenceinterviewswerecarriedoutwithindividualsfromdifferentassetownerorganizations,sevenofwhichrepresentedGroup1(powerfulasdefinedinthisstudy)executivesattheCEO/CIO/Trusteelevel,andonerepresentedaGroup2(lesspowerfulas

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definedinthisstudy)seniorresponsibleinvestmentexecutive.Allintervieweeswerepromisedanonymitytoencourageanopenandfrankdialogue.

4.2Interviewfindings

4.2.1OverallthemesDuringtheinterviewstherewereanumberofthemesthatemergedintermsofhowindividualsinseniorpositionsinsideassetownerorganizationshavepersonallyexperiencedthechallengeswithincorporatingclimatechangeintoinvestmentprocesses(n.b.italicsindicatedirectquotationfrominterviewees).

Informationalversusbehavioralbarriers:Nointervieweesfeltthatthechallengeswithtakingactiononclimatechangewaspurelyduetolackofdataoravailabilityofmodels–orevenpolicyortechnologybreakthroughs–alltheintervieweestalkedabouttheimportanceofpeople,trust,andpersonalrelationshipsinsidetheirorganizations.Thisisakeyfinding.

● Indeed,accordingtomanyoftheinterviewees,thevolumeofreal-worldevidenceinpolicy,technology,weather,andscienceishelpingtobreakdownthebarriersfornottakingaction.

● Oneintervieweenoted,“Whentownsstartshuttingdownbecauseofextremeweather,thensurelythatwillchangethings.Weareallgoingtodieifwedon’tdoanything,it’sascarytrend.”

● Anotherintervieweenotedtheimportanceofthehumandimensiontoinvestment,statingthat“Performanceisachievedbyindividualsnotbymodels.”

Beliefs:Personalbeliefprovidedalotofthedeterminationtodosomethingdifferentfromtheirpeers–notamoralorethicalbelief,butonesteepedinthebeliefthatclimatechangeisnotgoingaway,andthatmitigationisthelogicalthingtodo.

● Indeed,manyoftheintervieweesindicatedthatmostbarriershavebeenovercomebyafirmbeliefthatthisishappeningandthatthetransitionisinevitable.

● Leadershaveaconvictionthattheywillberewardedatsomepoint,thoughtheydon’tknowwhen.

● Allintervieweesthoughtincentiveswereimportantbutstressedit’smoreaboutthebeliefsthanincentives.

● Oneintervieweehighlightedthatconvictioniskey,notingthat“Ourconvictionthatwearerightonclimateisstrongerthanourfearoffailure.”

Trust:Strongoverallfund/individualperformanceisakeyelementthatallowedanindividualtodriveaproactiveclimateagendaanddevelopastrategy.Thisperformancecreatestrustfrom

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theboardthatallowstheboardtoovercomeanyfearsaboutriskinbeinguniqueorproactiveoverclimate.

● Trustiskeynotonlyforapprovalofaclimatechangestrategy,butalsotoprovidethedelegatedauthoritytoimplementit.

● Oneintervieweenotedthat“Thedecision-makingonhowweimplementthesustainableinvestingframeworkisours–theboardagreetheframeworkandtrustmetomaketheinvestmentsandtheyholdmeaccountableforthoseinvestment”.

● “YouneedtheCEOandCIOtohavethemandateandtrustfromtheboard.”

Culture:PressureonC-suiteexecutivesfromevenoneortwoboardmembersishelpfultoopenupadialogueontheissue,buildingaculturethatembraceschangeandultimatelydrivesaction.

● Toensurepositiveclimatebehavior,leadersemphasizedtheimportanceofhavingaculturethatpromotesandencouragespeopletodothingsdifferently.

● Someleadersexperiencedearlyresistancefromcolleaguesandboardmembers.Theythoughtitwasmakingtheirlifeharder,e.g.byimplementingnewbenchmarks.However,itwasexplainedthatoncetheresisters(internallyattheBoardandexecutivelevel)hadachancetobeheard,theywerelessresistant.Asoneintervieweenoted“Oncetheyhadachancetoreporttheirstance,theyhadanoutlet,feltlesssidelinedandmorelistenedto”.

● Somesimpleprocessescanhelpovercomebehavioralbarrierssuchasfocusingboardconversationson10yearreturnsratherthanannualreturnsandperformanceonleaguetables.

Perceptionofrisk:Theintervieweesallfeltthatthedegreeoffinancialrisktobecomealeaderwassmall.Thisisunderstoodbytheleaderswhocanallocatecapitaltolowcarbonassetsandstilltakeminimalcareerorreputationalrisk.

● Oneintervieweenotedthatratherthanbeingafraidofmovingaheadofconsensusopinion,thiscanactuallyworkinfavorofinvestmentoutcomes.“Thereisafirstmoveradvantage.Riskadjustedreturnsarebetterifyougofirst.”

● Anotherintervieweeexplainedthedynamicprocessandhowperceptionofriskcanchangeovertimeinregardtoclimatechange.“Wesawourpropertyportfoliolaggingandthoughtmaybeitwasthegreenpoliciesaffectingperformance.Whenwelookedatitwecouldseeitwasn’tthatbutothersectordriversandforces.Itthenreboundedwellandweuseditasanexampletodemonstratetotheboardweneededtoholdournerveonsustainability.”

Findingthecomfortzone:Therewassomeevidenceofanchoringamongsttheintervieweestowhattheyfeelmostcomfortablewith.Mostexplainedthatitisfareasiertoexpandafund’sclimatestrategyandinvestinlowcarbonopportunitiesifthereturnsfromexistinginvestments

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arereasonable.Accordingtomostoftheinterviewees,thereturnsdon’thavetobehigherthanotherareas,justcomparabletootheropportunitiesinsimilarassetclasses.

● Oneintervieweenotedthat“othertypesofinvestments,notnecessarilyclimaterelated,whichhavebouncedbackafterpoorperiods,provideagoodprecedentformaintainingfaithinanexistingclimatestrategy.”

● Almostalltheintervieweesdidn’tbelieveindivestmentornegativescreening.

● Asanotherintervieweenoted,itisimportanttobuildatrackrecordandknowledgeovertimeforcredibilityandtoreducethedifficultyofbuildinganewprogramofinvestments,as“CEOandCIOscanonlyallocateinternalcredibilityefforttoacertainnumberofissues.”

● Overallfundperformanceiscriticaltoacting,asoneintervieweenotedonperformance.“Beingagoodperformingfundisimportanttobeingabletoactonclimate.4thquartileinvestorsdon’twanttotakerisks–theywillheadtoa3yearmiddleofthepackherdpositiontogetthemselvesbackuptheranking”.

Reluctancetoforecast:Eventhemoreprogressiveassetownersamongstthoseinterviewedinthisresearchhavenotgoneasfarasdevelopingapublic“basecase”expectationforclimatechangeyet,astheyhavebeenabletoactwithouthavingtodothis.

● Ourdiscussionsindicatedthattodevelopafullyfledged“Paris-aligned”basecasewouldbetotakeaverybigbetthatmostintervieweeswerereluctanttotake.However,oneCEOwassoconvincedaboutthefuturecoststhatwillariseinthetransitiontoalowcarboneconomythatheimplementedfossilfuelfreebenchmarksacrosstheentireequityportfolio.“IputourforecastbasecasebeforetheboardandtheyaskedifIcouldguaranteethatallmyfactsandfigureswererightandofcourseIcouldnot,andyounevercan,buttheyonlyaskthiswhenyouaretryingtodosomethingthatyourpeersarenot.”

● Theuncertaintyaroundtimingandreluctancetotakeastrongvieworforecastthetrajectoryofclimatechange(andwhenthetippingpointwillbereached)isrevealedasoneintervieweeexplainedthat“Ithinkithastoflipinthenextfiveyears,butI’vebeenwrongbefore.Ifyouaskedme30,20,10years,etc.,youwouldhavethoughtitwouldbesorted,butwedon’tseemtobegettingcloser.Itisimpossibletotellwhenthetippingpointmightbe.IfI’dtakenthatviewoverthelast30years,Iwouldhavebeenconsistentlywrong”.

Peers:Ratherthanfeelingpressuretostayinthepackandnotgotoofarfromthe‘norm,’theleaderswereoftendisparagingofpeerswhohadfailedtoseetheobviousrisksorwhowereunwillingtoovercomeanyfearsorbiasesinordertoactonclimatechange.

● Allintervieweesrecognizedintheirpeersthatitiseasiertofindreasonsnottodosomething.

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● Oneintervieweewas“AmazedthatmostCEOsofpensionfundsaremorescaredofdoingwrongthantakingriskandmovingtheneedle.”

● Anotherstatedthat“Thechallengewiththisindustryisthat99%ofpeoplejustwanttofollow.Tryingtodothingsyoubelieveinhasverylittleupsideinourindustry.PeoplewhohavejobslikeIdojustgetcomfortableandwanttocliptheirannuityattheendoftheday.”

● Therewasalsoasenseofthewiderbenefitsincollaboration.Forexample,joininglowcarboninvestingpartnershipswasseenbysomeintervieweesasagoodwaytoovercomebarriersasothersfeelcollectiveriskisbeingtaken.

Externalpressure:Ourdiscussionsindicatedthatexternalpressuresfrombeneficiaries/members,employers,regulators,NGOs,orthemediatotakeactioncanbeeffectiveatovercomingbehavioralbarriersandhelpingtoprioritizeclimatechangeinternallyacrossassetowners’executivefunctions.

● Ontheflipside,publicscrutinycanalsoincreaseriskaversionamongstsomeBoardmembersandcreateafearofgoingtoofaronanissueandgettingitwrong.Forexample,oneintervieweestated,“IsubmittedaplanforlowcarboninvestmentandtheboardaskedmewhatwillItellthejournalistsifIgetthiswrong?”

● Anotherintervieweealsonotedtheroleofexternaladvisors,andhowthiscanpresentachallengeiftheconsultants(forexample)arenotfullysupportiveoftakingactiononclimatechange.“Itiseasyforanybodyalongthewaythatwantstosowseedsofdoubt–consultantsforinstancecanalwayscomeupwithreasonsnottodoit.”

4.2.2LeadersandbiasesWithacknowledgementoftheinherentselectionbiasintheinterviewees,someofthemostsurprisingfindingsconcernedbehavioralbiasesthatwehadanticipatedinouranalysisbutactuallyhadn’tshownupininterviews.Theabsenceofmanyofthesebiasesinleaderswasperhapsthemostimportantfindingintheentirestudyinthatitdemonstratesthatwithsomeeffortandattention,thesebiasesarenota‘given’andcanbeovercome.Indeed,theseinsightswillhelptoguidefurthereffortstodesignsolutionsandaltertheframingofclimatechangeinsidetheexecutiveofassetownerorganizationsasawaytoovercomethebiasesthatmayprevailoutsideoftheso-called‘leading’communityofinvestors.Forexample:

● Baserateneglect(thebiastowardsmoredetailedinformationandignoringbroaderinformation)wasnotstrong.Wehadanticipatedthatalackofdetailonissueslikecleaninvestmentreturnswouldbeabarrier,butitwasn’t–itwasovercomebymorepositiveinfluencessuchastrustfromaboardintheCIOorCEOand/oratrackrecord.

● Fulldivestmentwasnotconsideredbyanyofthefunds.Thiswascitedfortechnicalreasons

thoughsomeanchoringbias(thetendencytorelytooheavily,or"anchor",ononetraitorthefirstpiecesofinformationwhenmakingdecisions)waspresent,believingtraditional

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diversificationwasnecessaryintheabsenceofotherinformation.TherewasnounderstandingofGrantham’ssectoranalysistoquestionthatposition.

● Therewasalsoalackofavailabilityheuristic(thetendencytooverestimatethelikelihoodof

eventswithgreater"availability"inmemory,whichcanbeinfluencedbyhowrecentthememoriesareorhowunusualoremotionallychargedtheymayberatherthanunknownoruncertaindata)amongstleaders–theyhadgonesearchingforclimateopportunitiesandsohadovercomeanydispositiontolowertheprobabilityfortheclimatetransition.

● Therewasalsoalackofsub-additivityeffect(thetendencytojudgeprobabilityofthewholeto

belessthantheprobabilitiesoftheparts)andzeroriskbias(reducinglowprobabilityrisksfromsmalltozero.)–theleadersaresoconvincedabouttheinevitabilitythattheyhaveusedindividualprobabilitycomponents(cleantechnology,risingextremeweatherevents,policymomentum,investorleadership)toreinforcetheirpositions.

● However,evenamongstleaderstherewassomenormalcybias(therefusaltoplanfor,orreact

to,adisasterwhichhasneverhappenedbefore)asnonehadthoughtseriouslyaboutahighlyvolatileclimatetransitionpointeventhoughtheiractionsweretrendingtowardsamoreprogressiveclimateposition–thusthebehaviorsareanelementofdegreetosomeextent.

● Alackofcognitivedissonancewasgenerallyapparentamongstclearerleaders–itwasn’t

ethicallyormorallydrivenactionevenwhentheyfeltmorallyaggrievedatthelackofactionelsewhere.Theysimplyhadabeliefthatclimatechangewasreal,happeningandguaranteedtoacceleratemakingtheirdecisiontoactjustified.However,someintervieweesalsodisplayeddissonanceinrecognizingtheimportanceofclimatechangebutlimitingtheirresponsetotacklingit,admittingthattheywere‘dabblingattheedgesofaction.’

● Therewasnoevidenceofthelawoftheinstrument(anover-relianceonafamiliartoolor

methods,ignoringorunder-valuingalternativeapproaches,e.g."Ifallyouhaveisahammer,everythinglookslikeanail").Noneusedtraditionalrelianceonstrategicassetallocationmodels,valueatrisk,modernportfoliotheory,orefficientmarkethypothesisintheirthinking–infact,allwereconvincedthatmarketshadgotitwrong.

● Asatactic,leaderswhocreatedabroadframeworkforclimatefirstbasedonbeliefsorsimilargovernanceelementsalloweddoubterstoalignwiththeclimatestrategybeforeapprovingthespecificsoninvestments.

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[i]SeeforexampletheLongTermInvestorsClub(http://www.ltic.org);andtheFocusingCapitalontheLongTerminitiative(https://www.fcltglobal.org/)

[ii]http://sabeconomics.org/wordpress/wp-content/uploads/JBEP-2-1-8.pdf

[iii]Simon,H.A.(1982).Modelsofboundedrationality.Cambridge,MA:MITPress.Rationalityisboundedbecausetherearelimitstoourthinkingcapacity,availableinformation,andtime(Simon,1982)

[iv]Assetownersincludepensionfunds,superannuationfunds,insurancecompanies,charitiesandendowments

[v]SeeforexampleCritchlow,K,IrrationalApathy:InvestigatingbehaviouraleconomicexplanationsfortheCarbonBubble,(unpublishedMastersthesis)

[vi]A.Carvalho,Climatechangeasa‘grandnarrative’,Jcom09(04)(2010)C03

[vii]http://www.apa.org/science/about/publications/climate-change.aspx

[viii]VanderLinden,S,2017,DeterminantsandMeasurementofClimateChangeRiskPerception,Worry,andConcern.Inbook:OxfordResearchEncyclopediaofClimateScience,OxfordUniversityPress,editorM.Nisbett

[ix]https://www.bis.org/review/r151009a.pdf

[x]http://psiexp.ss.uci.edu/research/teaching/Tversky_Kahneman_1974.pdf

[xi]https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1583509

[xii]https://www.economicsnetwork.ac.uk/sites/default/files/Ashley/6%20References%20for%20KBC.pdf

[xiii]Schneider,F.W.,Gruman,J.A.,&Coutts,L.M.(2005).Appliedsocialpsychology:Understandingandaddressingsocialandpracticalproblems.ThousandOaks,Calif:SAGEPublications.

[xiv]https://www.globalpolicyjournal.com/blog/06/07/2018/market-valuing-climate-risk-all-wrong

[xv]Source:http://www.apa.org/science/about/publications/climate-change.aspx

[xvi]Foucault,M(1982)TheSubjectandPower,CriticalInquiry,Vol.8,No.4,pp.777-795,http://www.jstor.org/stable/1343197

[xvii]Cronbach,L.J.,andMeehl,P.E.(1955).Constructvalidityinpsychologicaltests,PsychologicalBulletin52:281-302;Brymer,A.andCramer,D.(2005).QuantitativeDataAnalysiswithSPSS12and13:AGuideforSocialScientists.Routledge:London.

[xviii]https://www.cesarsway.com/cesar-millan/cesars-blog/power-of-the-pack