Institutional Investors and the behavioral barriers to taking action on climate change

Cognitive and behavioral biases are preventing industrywide action by investors on climate change, according to a new report released today. Most prior analyses have focused on informational barriers such as uncertain policy, lack of data, and insufficient investment grade opportunities, as core reasons for the slow progress to shift capital to the low carbon economy – but new findings demonstrate that a range of behavioral biases, cultural barriers, and attitudes, are at the root cause of the problem.

The report, commissioned by ClimateWorks Foundation in partnership with Climate Insight of Australia, examines why leading climate investors are rapidly outpacing their peers despite having access to the same information.

The report conducted and analyzed extensive surveys and interviews with senior executives at major investment funds and found short-termism to be an important factor driving behavioral biases to not take action on climate change.

Other key findings in the report include:

• Leading climate investors were able to overcome all internal and external barriers in driving their fund to its position of leadership on climate friendly investments
• C-suite level executives are more reluctant to address climate change – mainly because of career and reputational risks
• Only executives in high performing funds feel as if they have the credibility to act on climate – “4^th quartile funds don’t take risks”
• Most respondents do not think their peers are taking strong action on this issue so there is a lack of motivation to act.
• There is general acknowledgment of climate change as a systemic risk, but in practice at the day-to-day level, there is a little action on the issue
• Desire by asset owners to outsource leadership to service providers such as asset managers