Think about the last time you bought something expensive to make yourself feel better after a disappointment or when you treated yourself to a fancy and expensive dinner after some accomplishment.
Emotions have a profound effect on purchasing decisions. More often than we realize, we make these decisions based on rational calculations and feelings rather than facts. It is well documented that financial decisions are also influenced by emotions.
People tend to be more pessimistic about firms’ prospects in periods of low mood, which is associated with declining stock market prices.
Due to the growing popularity of properties with a strong focus on environmental, social and governance (ESG) goals – companies with corporate policies that encourage them to act responsibly – we wanted to see how people’s needs for sustainable investment What role can emotions play in determining preference?
Why do investors choose sustainable investments?
There are many reasons why people want to invest in fixed assets. There may be some “social cues” – they like to talk about how socially responsible their investments are.
Another reason can be found in how one was raised. An individual’s propensity to invest in socially responsible assets is influenced by either parent owning the same property or growing up in a family that values ​​environmental sustainability.
Read more: Sustainable investing: is it worth the hype? here’s what you need to know
The “hot flash effect”, which is a nice feeling experienced through the act of giving, also explains why investors choose ESG assets. Regardless of the impact of the investment, investors tend to experience positive emotions when choosing a sustainable investment.
But does an investor’s mood affect their preference for sustainable investing? There can be many reasons for emotions affecting where people put their money.
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The role of mood in our investment decisions
There are two competing theories when it comes to examining mood and the role of sustainable investing.
The first is based on the idea that fixed assets are generally low-risk. In this sense, assets considered entirely or mostly durable have been shown to outperform less durable assets in crises, as investors view them as more trustworthy and with less structural, legal and reputational risk.
This theory is also based on the idea that a low mood leads to more risk-averse behavior. That is, when someone is sad, depressed or angry, they become more cautious when making investment decisions and choose less risky investments.
Read more: Why ethical investing is hard for large charities
A second, competing theory is based on the idea that a positive mood promotes prosocial behavior and greater altruism. Low-mood investors focus less on themselves and others. As such, they have a low preference for sustainable investments.
On the other hand, happy investors may be more altruistic and favor sustainable investments because it benefits others (for example, the community, the workforce, and the environment).
Our research has tested these theories, documenting evidence for investors’ over-risk avoidance.
More specifically, we found that a bad mood is associated with greater investment in fixed assets. This is arguably due to higher risk aversion pushing investors in favor of sustainable investments, which they consider less risky.
Read more: 5 tips for finding out if a tech company is an ethical investment in the stock market
How to identify durable funds and test the mood of investors?
To identify sustainable versus non-sustainable funds, we used the Morningstar Sustainability Rating. The purpose of this rating is to help investors better understand and manage the total ESG risk in their investments. A higher stability rating is associated with a lower ESG risk.
To capture changes in households’ average mood for a given month, we 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.
Indicates an increase in cases of high or symptomatic depression and, therefore, low mood on average. For the Northern Hemisphere, the OR is high during autumn (September), low during spring (March), and moderate during summer and winter. Countries in the Southern Hemisphere experience similar patterns in the opposite direction.
We did in relation to or contrast levels of investment in permanent equity mutual funds in 25 countries over the period 2018-2021.
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In general, mutual funds with higher stability ratings tend to attract more capital, suggesting that investors value sustainable investments.
More importantly, however, we found that when there was an increase in the percentage of seasonally depressed individuals, capital flows into high-stability funds were comparable to low-stability options (an additional 0.070% per month or 0.84% ​​per year). relative increased.
For an average mutual fund with a size of US$100 million, this additional capital inflow equals $840,000 per year.
This negative association is consistent with the risk aversion interpretation, supporting the conclusion that low mood leads to more sustainable investments because investors perceive them as less risky.
Read more: One Little Thing You Can Do for the Environment: Invest Ethically
Our study comes with a caveat. Given the characteristics of our data, we cannot test whether investors’ mood improves after investing in permanent funds. This will not only confirm that permanent investments are a safe option, but also that investing in them will give people a good mood.
So, is sadness good for the environment and society?
Our research explores a potential channel that may explain people’s preference for sustainable investments.
Our findings suggest that, when it comes to investing in permanent equity mutual funds, aversion to risk posed by negative moods was a more likely reason for increased investment than the potential happiness associated with their anti-social behavior.
This does not mean that sadness is good for the environment or society, but rather confirms that investors consider sustainable investing to be a safe option.
