“So much advantage in life comes from being willing to look like an idiot over the short-term” [a guy I follow on twitter]
I’ve got a confession to make.. well two actually.
Firstly, I’m biased. I have a vested interest in the Kames Global Sustainable Equity strategy being a success. Being a sustainable strategy, I also have bias towards wanting sustainable companies and investment funds to do well. Having reached the three year anniversary of our strategy, I’m more strongly motivated than ever to convince people of this. I always try to be wary of biases (especially my own) and one thing I have noticed over the three years co-managing and marketing our strategy is that sustainability is an emotional subject. And emotion increases the likelihood of bias.
When focused on long-term or absolute returns, I have noticed that investors find the merits of sustainable investing intuitive. However, when focussed on short-term risks (less than 3yrs) relative to the market, the fear of missing out (FOMO) becomes the focus. This focus on short-term relative risks is wrong. I believe that this bias means that any period of short-term relative underperformance is often viewed as proof that ethical & sustainable strategies have a performance cost. Meanwhile, there is increasing empirical evidence to the contrary.
I wanted to undertake a sustainable investing perception survey to test this theory. Do biases exist in the way ethical & sustainable investing is perceived? This leads me to my second confession. We tricked you. I’m sorry… It was a wee white trick. We devised a series of positively framed questions and a series of negatively framed questions. Essentially the same 4 questions, except we split the respondents into two groups, one group received the positive questions and the other received the negative ones (this is called an A/B test). The intention was to see if how the question was framed, affected how people responded. The 5th question was a neutral one, the same for all.
I’d like to thank the 590 wonderful people who took the time to complete the survey. Many respondents also made qualitative comments which is great. In terms of statistical significance, I think this number of responses puts us somewhere between a spurious “firmer skin in two weeks” beauty product claim and the certitude that climate change has been induced by humans. I’ll let you decide which it is closer to. It’s probably worth pointing out that I’m not a statistician or psychologist, and I’m not claiming a significant breakthrough here but I do think we can learn something from the results.
For those of you wanting to cut straight to the point, I’m going to go rogue and get straight to the juicy bit of every report – the conclusion. [For those with the time and curiosity to get into the detail, the question-by-question analysis is appended below along with some intuitive charts. Please contact me if you want to dig even deeper.]
It is clear that both groups believe companies benefit from acting ethically or sustainably (and that there are risks if they don’t). I had expected negative framing to effect the results but it did not. However, when considering the implications on fund manager performance, the results from each group was significantly different. A positive framing led to strong agreement of a performance benefit, whilst negative framing led to a meaningfully different skew. In fact, a negative framing led to more respondents suggesting it would hurt fund manager performance than help it. To me, this seems like a contradiction. On one hand, companies and their share prices will benefit from being ethical & sustainable, but on the other hand fund managers who invest in such companies will suffer a performance cost. It certainly confirms my prior bias anyway.
Finally we gave both groups a free option. Would you want to help the planet and society if there is no downside? Unsurprisingly, the response was overwhelmingly positive. I would suggest the fact that a small minority were willing to give up this free option, is indicative of an extreme bias against ethical & sustainable investing. A kind of protest vote against the whole notion of it.
Where to from here?
I believe the inclination to negatively frame ethical & sustainable investing (including tentative or apologetic language) cultivates the bias that there is a performance cost. Despite increasing evidence that ethical & sustainable investors can generate investment alpha and despite market support for this view, the short-term relative risk of underperformance still casts a long psychological shadow. This is still a barrier to adoption of ethical & sustainable investment strategies today, but I believe there are three ways we can collectively lower these barriers.
- Long-term performance: We need to aim for better than the market over a longer time frame. We will do this by investing in good ethical & sustainable companies, not managing short term factors. In short – as the quote at the outset suggests – if we want to gain an advantage (investment alpha) we should be willing to risk looking like idiots (underperform) in the short term.
- Education: Misinformation and historic biases exist. The weight of evidence is in our favour. Continually promoting the empirical and intuitive evidence of why it works should be a priority. This is why our sustainability soapbox exists
- Absolutely positive: Investors broadly appreciate that companies benefit from acting sustainably. When discussing sustainable investing, focus on these long-term absolute benefits rather than negative language which encourages short-term thinking and historic biases. See How to talk to sustainable investing sceptics
One last thing. We started our global sustainable journey three years ago. Our BHAG (Big Hairy Audacious Goal) was to be the best performing global equity fund in the world. We can’t claim to have achieved that (yet J) but we’ve done well over this relatively short time frame. It is our continued aim that our investments, our performance and this blog to have a positive impact on the planet, society and client returns.
Results in more detail
Sample bias is likely in the results with more sustainably minded investors (our blog readers etc.) being over-represented. Responses came from a variety of backgrounds including professional financial advisors, buy-side and sell side investment professionals, general financial professionals and a small number of interested retail investors.
Questions 1, 2 and 3 were designed to see if investors expected sustainable actions by companies to result in benefits or costs. I wanted to consider both fundamental economic impacts (i.e. revenue and profits) and market perception (i.e. valuation and risk). NB – Because of the A/B test, strong agreement to the positive questions = strong disagreement in the negative questions. The charts below show that respondents from both groups were in strong agreement that companies acting ethically & sustainably will see positive market / economic benefits. There is no significant difference.
Question 4 was designed to ask the all-important question (well to us fund managers anyway) of whether a fund manager’s performance is effected by investing ethically & sustainably. The charts below show that when framed positively, 67.4% of respondents agreed or strongly agreed that there could be a direct performance benefit to investing sustainably. When framed negatively, the equivalent response was only 41.9%. A 25.5% divergence. 43.2% of responses to the negatively framed question agreed or strongly agreed that performance could be impaired by excluding companies that have negative impacts. To put it statistically, there is a clear skew in the distribution of responses which suggests that the framing of the question has influenced the results.
Question 5 was the same for everyone (no tricks here). A simple hypothetical question. Would you invest in an ethical or sustainable fund rather than “traditional” fund if the risk / reward was the same? An overwhelmingly positive response shows that 92.2% of respondents either agreed or strongly agreed that they would rather invest in a sustainable or ethical fund vs a “traditional” fund, all else equal.
About the author
Craig Bonthron is an investment manager in the Equities team, responsible for co-managing global equities portfolios. He joined us in 2014 from SWIP, where he was investment director in global equities. In addition Craig also had analysis responsibilities for the tech, energy and utility sectors. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors, a member of the global environmental equity team. Craig has a 1st Class honours degree in Building Surveying, an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 17 years’ industry experience*. *As at 30 November 2018.