Emotions have a strong influence on purchasing decisions. Because of the growing popularity of assets with a strong focus on environmental, social and governance (ESG) goals, scholars decided to look at what role emotions can play in determining people’s preference for sustainable investments.
In a new paper published this month in the journal Economics Letters, professors Alexandre Garel (Audencia), Adrian Fernandez-Perez (Auckland University of Technology) and Ivan Indriawan (University of Adelaide) found that pessimism and worse mood are associated with greater investment in sustainable assets.
The scholars tested two competing theories examining the role of mood and sustainable investment.
The first is based on the idea that sustainable assets are generally less risky. Assets that are considered completely or mostly sustainable have been shown to outperform less sustainable assets in crises, as investors see them as more trustworthy and having fewer structural, legal and reputational risks. This theory is also based on the idea that a lower mood leads to more risk-averse behaviour. So, when someone is sad, depressed or angry they tend to become more cautious when making investment decisions and choose investments with lower risk.
A second and competing theory is based on the idea that a positive mood promotes prosocial behaviours and greater altruism. Investors with lower mood tend to focus on themselves and less on others, and are less likely to buy sustainable investments. Happier investors, on the other hand, may be more altruistic and favour sustainable investments because it benefits others (for example, community, workmates, and the environment).
“Our research has tested both theories, and we found that a worse mood is associated with greater investment in sustainable assets. This is arguably due to a greater risk aversion pushing investors to favour sustainable investments that they perceive as less risky,” says Alexandre Garel, lecturer in Finance at Audencia.
Methodology
To identify sustainable versus non-sustainable funds, the scholars used the Morningstar Sustainability rating, a rating intended to help investors better understand and manage total ESG risk in their investments. A higher sustainability rating is associated with a lower ESG risk.
To capture the change in the average mood of households for a given month, they used a metric called “onset and recovery” (OR). This metric measures the change in the monthly percentage of seasonally depressed individuals who are actively experiencing symptoms.
Higher OR indicates an increase in symptomatic depression and thus, lower mood. For the Northern Hemisphere, OR is high during autumn (September), low during spring (March), and moderate during summer and winter. Southern Hemisphere countries experience the same pattern in reverse.
The scholars contrasted OR levels in relation to investment in sustainable equity mutual funds in 25 countries over the 2018–2021 period.
In general, mutual funds with high sustainability ratings tended to attract more capital, suggesting that investors value sustainable investments. More importantly, however, they found that when there was an increase in the percentage of seasonally depressed individuals, capital inflows into high-sustainability funds increased relative to low-sustainability alternatives (an extra 0.070% per month or 0.84% per year). For an average mutual fund with a size of US$100 million, this additional capital inflow equates to $840,000 per year.
“This negative association is consistent with a risk-aversion interpretation and supports the conclusion that lower mood leads to more sustainable investments as investors perceive them as being less risky. However, our study comes with a caveat: given the features of our data, we cannot test if the investors’ mood improves after investing in sustainable funds. This would not only confirm that sustainable investments are a safer option, but also that investing in them will boost people’s mood,” says Garel.
So, is low mood actually good for the environment and society? “Our findings suggest that, when it comes to investing in sustainable equity mutual funds, risk aversion triggered by negative moods was a more likely cause of increased investing than the potential happiness connected to their pro-social behaviour. This does not imply that sadness is good for the environment or society, it simply confirms that investors consider sustainable investments a safer option,” Garel concludes.
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Sadness Boosts Sustainable Investment
Emotions have a strong influence on purchasing decisions. Because of the growing popularity of assets with a strong focus on environmental, social and governance (ESG) goals, scholars decided to look at what role emotions can play in determining people’s preference for sustainable investments.
In a new paper published this month in the journal Economics Letters, professors Alexandre Garel (Audencia), Adrian Fernandez-Perez (Auckland University of Technology) and Ivan Indriawan (University of Adelaide) found that pessimism and worse mood are associated with greater investment in sustainable assets.
Sadness Boosts Sustainable Investment
Emotions have a strong influence on purchasing decisions. Because of the growing popularity of assets with a strong focus on environmental, social and governance (ESG) goals, scholars decided to look at what role emotions can play in determining people’s preference for sustainable investments.
In a new paper published this month in the journal Economics Letters, professors Alexandre Garel (Audencia), Adrian Fernandez-Perez (Auckland University of Technology) and Ivan Indriawan (University of Adelaide) found that pessimism and worse mood are associated with greater investment in sustainable assets.
The scholars tested two competing theories examining the role of mood and sustainable investment.
The first is based on the idea that sustainable assets are generally less risky. Assets that are considered completely or mostly sustainable have been shown to outperform less sustainable assets in crises, as investors see them as more trustworthy and having fewer structural, legal and reputational risks. This theory is also based on the idea that a lower mood leads to more risk-averse behaviour. So, when someone is sad, depressed or angry they tend to become more cautious when making investment decisions and choose investments with lower risk.
A second and competing theory is based on the idea that a positive mood promotes prosocial behaviours and greater altruism. Investors with lower mood tend to focus on themselves and less on others, and are less likely to buy sustainable investments. Happier investors, on the other hand, may be more altruistic and favour sustainable investments because it benefits others (for example, community, workmates, and the environment).
“Our research has tested both theories, and we found that a worse mood is associated with greater investment in sustainable assets. This is arguably due to a greater risk aversion pushing investors to favour sustainable investments that they perceive as less risky,” says Alexandre Garel, lecturer in Finance at Audencia.
Methodology
To identify sustainable versus non-sustainable funds, the scholars used the Morningstar Sustainability rating, a rating intended to help investors better understand and manage total ESG risk in their investments. A higher sustainability rating is associated with a lower ESG risk.
To capture the change in the average mood of households for a given month, they used a metric called “onset and recovery” (OR). This metric measures the change in the monthly percentage of seasonally depressed individuals who are actively experiencing symptoms.
Higher OR indicates an increase in symptomatic depression and thus, lower mood. For the Northern Hemisphere, OR is high during autumn (September), low during spring (March), and moderate during summer and winter. Southern Hemisphere countries experience the same pattern in reverse.
The scholars contrasted OR levels in relation to investment in sustainable equity mutual funds in 25 countries over the 2018–2021 period.
In general, mutual funds with high sustainability ratings tended to attract more capital, suggesting that investors value sustainable investments. More importantly, however, they found that when there was an increase in the percentage of seasonally depressed individuals, capital inflows into high-sustainability funds increased relative to low-sustainability alternatives (an extra 0.070% per month or 0.84% per year). For an average mutual fund with a size of US$100 million, this additional capital inflow equates to $840,000 per year.
“This negative association is consistent with a risk-aversion interpretation and supports the conclusion that lower mood leads to more sustainable investments as investors perceive them as being less risky. However, our study comes with a caveat: given the features of our data, we cannot test if the investors’ mood improves after investing in sustainable funds. This would not only confirm that sustainable investments are a safer option, but also that investing in them will boost people’s mood,” says Garel.
So, is low mood actually good for the environment and society? “Our findings suggest that, when it comes to investing in sustainable equity mutual funds, risk aversion triggered by negative moods was a more likely cause of increased investing than the potential happiness connected to their pro-social behaviour. This does not imply that sadness is good for the environment or society, it simply confirms that investors consider sustainable investments a safer option,” Garel concludes.
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