It's Only Human
For some, switching to a sustainable investing strategy can feel like making a New Year’s resolution. We can believe wholeheartedly that it’s good for people, the planet, and even returns, but for some reason we can’t get around to doing it consistently.
Why can it sometimes be so hard to put our money where our mouths are? A new report, called Only Human by Morgan Stanley’s Institute for Sustainable Investing, looks at why there’s sometimes a disconnect between our intentions and actions when it comes to investing with social or environmental goals in mind, and gives tips on what we can do about it.
Sustainable investing is doubly hard to stick to because it involves two actions – aiming for social or environmental impact, like fighting climate change and investing – both of which can fall foul of our tendency to react to short term events, act on our emotions, avoid uncertainty and match group behavior.
“Already investing decisions can be challenging, precisely due to their high stakes, high risk and often uncertain nature. Sustainable investing, by layering on environmental, social and governance considerations, can create additional complexity,” the report says.
The report sites research by acclaimed behavioral economists, like Duke University's Pofessor Dan Ariely, which delves into the psychology of decision-making. Our short-term, group-behavior biases are ingrained patterns of behavior deeply rooted in survival. They serve us well when the decision is a simple, low-stakes one, like what to wear, and especially if the payoff is sooner rather than later. But they can lead us astray when it comes to complicated decisions like investment, which requires long-term goals to be consistently top-of-mind.
Even seasoned investors can panic and bail out of markets during a sell-off because everyone else is, when the better move might be to ride out volatility or wait for an upturn. Investments with environmental or social issues in mind often have long-term objectives with a payoff far into the future, which is hard for people to consistently follow when they feel their efforts are not common behavior and merely a drop-in-the-bucket.
Tips for Change
The good news is that our short-termism and other behavioral biases can be overcome, according to the report, which gives 7 tips on how to start sustainable investing and stick with it.
1. Make a Plan
Sitting down with a financial expert specialized in incorporating impact goals into an overall investing plan will help you follow an approach that includes both financial and sustainability goals.
2. Write It Down
Take the time to carefully chart a course for an investment strategy alongside articulated impact goals. As one of the authors of the report says, “It’s amazing how powerful the actual act of writing down a long-term goal can be in ultimately realizing it.”
3. Baby Steps
Try easing into a sustainable investment strategy by allocating only a percentage of total assets. Or alternatively, identify a particular issue on which to focus, like energy, sustainable agriculture, or gender issues.
4. Stick to What You Understand
“Through work at the Institute, it has become clear that investors are comfortable with products that are already familiar to them,” states the report. It’s one reason why the green bond market has taken off in recent years, as sustainably-minded investors look to buy traditional securities.
5. Keep It Fresh
Regularly re-evaluate how well your investments are aligned with long-term financial and sustainability goals. Doing so ensures strategies built to work 20 or 30 years from now remain the focus, and it also makes longer-term pay-offs tangible.
6. Stay Calm
When markets are volatile and herd mentality tempts, “be mindful of how emotions and near-term influences can affect decision making,” the report states. If the tips above are followed, long-term sustainability investors can draw confidence from regular re-evaluations. It ensures portfolios are driven by data rather than emotions.
7. Dial Down The Noise
Step back from the markets when volatility climbs. “Dialing down the noise or distraction can allow investors to think and act deliberately and ultimately to realize performance and impact goals alike,” says the report.
Download the report for more detail.
For more information, please visit the Morgan Stanley Institute for Sustainable Investing webpage.
Morgan Stanley (NYSE: MS) is a leading global financial services firm providing investment banking, securities, wealth management and investment management services. With offices in more than 43 countries, the Firm's employees serve clients worldwide including corporations, governments, institutions and individuals. For further information about Morgan Stanley, please visit www.morganstanley.com.