American psychologist Abraham Maslow once said, “If the only tool you have is a hammer, you tend to see every problem as a nail.” In other words, those with less comprehensive knowledge, perspective or “tool sets” often propose the same familiar solution to every problem they encounter. This thought begs consideration of potential investment insights to be derived by looking at the intersection of psychology and finance. Perhaps we can find better solutions to systemic problems in the functioning of the world’s capital markets. If investors, analysts, portfolio managers and corporations could broaden the areas of inquiry pursued as they make decisions, better risk-adjusted returns could be at hand. I believe it is essential that the investment research tool set include an integrated view of management effectiveness in the areas of Environmental, Social and Governance (ESG) performance, more broadly known as “sustainable investing.”
Finding new tools requires taking a fresh perspective and perceiving things in a new way. Perspective is a critical mental process that contributes to “knowing.” Some analysts and strategists who opine on investments in search of ”alpha” speak as if they truly know the future. They don’t. But many do attempt to achieve what Maslow might call “self-actualization” and, in the course of their investment analysis, they can work from a higher place in Maslow’s “hierarchy of needs.” They have a more solid acceptance of facts, a lack of prejudice or bias, and greater creativity, spontaneity and problem solving capabilities. These market thought leaders are better equipped to offer insight into optimal investment and capital allocation decisions. They are more likely to draw predictive conclusions about economic outcomes and investment returns. Arguably, they are more conscious of the limits on their ability to know all the answers and better positioned to pursue important avenues of inquiry without unconscious bias.
Also, some insights from the field of Behavioral Finance might help. Social, cognitive and emotional factors affect economic decisions. The thing about cognition, or “knowing,” is that, just like with investing, it includes awareness, perception, reasoning, remembering and judgment. Every tool at one’s disposal should be used to gain knowledge and an information edge in the capital markets. The tools or disciplines of “Sustainable Investing” are simply a huge global consciousness-raising exercise. It is not rational to use an investment decision-making process that omits material factors of ESG. Behavioral finance brings the apparently irrational together with the practical. Notwithstanding incentivization systems that might undermine the search for good long-term risk-adjusted returns, the ability to delay gratification can pay off if new tools are deployed.
These new tools are simply a different set of questions. For instance, consider serious inquiry into both the costs and opportunities from the de-carbonization of the global economy. Ask about supply-chain optimization, great employee engagement and regulatory compliance. Consider risk management procedures, succession planning and diversity. These are all critical avenues of inquiry into understanding corporate productivity, innovation and growth. So, I would suggest that all stakeholders expand their tool set and seek to make decisions from a more “self-actualized” place by asking these material questions about sustainable investing practices.