Katia Lobre-Lebraty
Associate professor (HDR) at the IAE Lyon School of Management
Jean-Moulin University Lyon 3
Marco Heimann*
Associate professor at the IAE Lyon School of Management
Jean-Moulin University Lyon 3
*Membre de la faculté du Business Science Institute
Article originally published on The Conversation France.
This article, based on a scientific paper, is published as part of the FNEGE-The Conversation France partnership around the États Généraux du Management held in Toulouse on May 26 and 27, 2016 on the theme "The impact of management science research."
Responsible investment strategies have experienced unprecedented growth. In Europe between 2011 and 2013 this growth was 22.6% for "thematic funds" and 91% for "exclusionary funds". In the United States, at the end of 2013, one out of every six dollars was invested according to a socially responsible strategy.
However, this craze for responsible funds is still driven by institutional investors. If we want to promote responsible investment among individuals, we must ask ourselves what their motivations for SRI (socially responsible investment) are and to what extent these motivations, when expressed, actually affect their investments?
The diversity of academic responses
The academic literature on the subject legitimizes this questioning, especially since published research often leads to contradictory results.
Indeed, according to some studies, SRI outperforms conventional investment, notably because the anticipation of the tightening of certain regulations or the reduction of exposure to intangible risks could well allow virtuous companies to outperform those that are less so! It is this outperformance that would be the source of investors' motivation.
Other studies show that the financial performance of SRI is comparable to that of conventional investments. Neither better nor worse. Therefore, the ethical convictions of investors could be expressed without jeopardizing the profitability of their investments. In other words, investors would be motivated by SRI because they would obtain the same performance as with conventional investments.
Finally, according to some research, refraining from investing in companies deemed insufficiently responsible represents a cost, particularly because it amounts to depriving oneself of the potential outperformance of these companies and because it reduces the potential diversification of investments. Thus, according to this work, SRI underperforms conventional investments. Therefore, if investors, convinced of this underperformance, still invest in SRI, it is because their motivation goes beyond financial performance.
Indeed, when financial performance is deemed good, one may decide to "do good" according to Hamilton's famous article entitled "Doing well while doing good? Such an attitude consists in not seeking to further increase financial performance, whether one is an investor or an organization. Motivation for SRI would therefore arise once a certain level of financial performance has been achieved!
Finally, some motivations appear to be totally disconnected from financial performance. For example, we observe: a psychological usefulness of SRI, in the sense that these investments would promote the serenity of investors by allowing them to be in agreement with themselves and/or to send a positive social signal about themselves, such as: "Look! I am a good person!" echoing the work of Jean Tirole, French Nobel Prize in Economics in 2014 about "delegated philanthropy".
The curious results of a simulation
In our study, the propensity to invest in responsible companies was measured through an investment simulation game. Participants were initially given a virtual €100,000 to invest in an investment universe composed of stocks from the STOXX Europe 600. In addition, to explore the motivations behind investment decisions, participants were asked to explain in writing their investment decisions over time.
In summary, the results of our study are as follows: our investors say they are motivated and interested in SRI because it provides them with good financial performance. They also mention an institutional or social pressure that would push them towards SRI because it is good, it is the right thing to do!
However, these expressed motivations do not necessarily translate into more responsible investments in their decisions. In particular, participants who expressed a motivation related to social pressure did not invest in more responsible companies. As for participants associating SRI and good financial performance, they only invested in more responsible companies when the overall performance of their investments was lower than that of the market; otherwise, their investments were not particularly responsible.
These results, which are surprising to say the least, are the result of a decision-making process leading to the participants' choices. It is therefore on this side that operational explanations can be found.
Anatomy and pathology of the decision-making process
In a simplified way, the decision-making process of investors can be represented by a loop linking Motivation-Decision-Outcome and allowing the localization of potential cognitive dissonances.
Dissonances between the expressed motivation and the decision taken. The decision does not correspond to the stated motivations of the decision maker. This is the case when it turns out that the decision-maker with financially successful investments and who declares himself motivated by SRI, has not invested in particularly responsible companies. How can this be explained? Either he "embellishes" his preference for SRI because he does not really believe in it; or he acts compulsively at the moment of choice, instinctively returning to the classic financial return. This is a case of financial causality prevailing over the result.
Dissonance between the decision and the result obtained. The results of the decision do not correspond to what the decision-maker expected. In our case, the investor believing in his qualities as a decision-maker and in the outperformance of SRI obtains poor financial results following his choices. He then reverses his belief and thus self-justifies. By mentioning his preference for social responsibility, he implies that it is the cause of his poor financial performance. In a way, SRI becomes his scapegoat in the Girardian sense of the term.
Dissonance between the results obtained and the initial motivation. The good financial results obtained by the investor make him forget in his actions his initial convictions for SRI. This phenomenon of forgetfulness explains why our investors with good financial performance expressed their conviction about the outperformance of SRI without this being reflected in their investment choices.
Such cognitive dissonance interferes with the decision-making process. Not only do they shed light on the results of our study, but they also allow it to be extended to the action level. How, in fact, can financial institutions that market SRI funds take advantage of this and, in particular, develop and retain their clientele for this type of product?
Pedagogy of multi-criteria choice
We believe that without being unethical, banks can exploit the social pressure that investors are under regarding SRI and that they expressed in this study: by providing these individual investors with clear and transparent information about SRI funds. How are they developed, what values are they composed of?
This information would allow investors to understand why oil stocks may be present in an SRI fund. They would then no longer have the feeling of being fooled by a "pernicious exploitation of their generosity"!
Through an educational effort enabling individual investors to understand that SRI funds tend to jointly optimize financial and societal performance. Decision-makers must realize that they are making decisions based on two criteria, the first relating to finance, the second to social responsibility, and that they are in fact seeking a satisfactory result for one subject to a minimum for the other.
It is by educating and informing individual investors about SRI that cognitive dissonance can be limited, and that beyond a discourse favorable to SRI, individual investors will actually act and invest in these funds.
Article translated from French with https://www.deepl.com/translator
Read also...
Marco Heimann's articles on The Conversation France.
Marco Heimann's books & articles via CAIRN.info.