Do investors cleanse their conscience through Socially Responsible Investments?

Socially Responsible Investment (SRI), an investment style which accounts for ethical values, environmental and social responsibility, as well as good governance, is growing at a rapid pace, providing investments aimed to combat climate change. However, the mobilisation of and upscaling of private investments are still required to meet international climate targets. Retail investors nowadays are substantially involved in SRI, and the number of retail market participants willing to invest in SRIs has been continuously increasing over the last few years, supporting the mobilisation of capital for green solutions.

Assessing the extent to which retail investors are willing to engage with SRI on the individual level and understanding the forces that drive them to incorporate ESG considerations into their portfolio selection process is essential to be able to accommodate their demand for SRIs and encourage it further.

Investing in SRI is considered a moral behaviour for retail investors, who can express their ethical and environmental concerns through investment decision-making. Moral emotions such as guilt, can be powerful motivators of ethical decisions and moral behaviours.

The link between guilt, moral cleansing and Socially Responsible Investment (SRI) decisions

In our recent paper, Cleansing Investor’s Conscience: The Effects of Incidental Guilt on Socially Responsible Investment Decisions, published in the Journal of Business Ethics, authored by Dr Ivan Sangiorgi, Victoria Gevorkova and Dr Julia Vogt, we investigate whether incidental guilt can influence SRI decision-making and lead retail investors to invest more in SRI. We show that investors who feel guilty have a significant preference towards green funds and are willing to sacrifice more return to invest sustainably in comparison with participants who do not feel guilty.

We surveyed more than 400 US retail investors and conducted an online experiment, with some of the participants asked to write about a recent event in the past where they felt guilty, and the others set an emotionally neutral writing task. They were then set an investment task involving trade-offs between risk, return, and sustainability across hypothetical funds. Our study shows that a moral cleansing mechanism might at times become activated among retail investors who are feeling guilty while making investment decisions, with guilty investors choosing more often to invest in green funds than non-guilty ones.

Can moral emotions be used to mobilise investments towards SRI?

The research reveals that SRI funds could incorporate emotional messages in their marketing materials as an efficient way to promote green investments. Guilt appeals are widely adopted in marketing - especially in charities - and are found to have a significant positive impact on donations, and the same approach could be used here.

Guilt is an extremely powerful moral emotion, and our findings have important practical implications for fund marketers, financial advisors, retail investors, and policy-makers, as well as being relevant for the practice of ethics in business.

For example, besides the potential implications for marketing, financial advisors need to be aware of the impact that the moral emotional states of their clients may have on their investment decisions. Experiencing a specific moral emotion before a meeting may unintentionally affect the sustainable investment decisions that a client makes.

However, the research comes with a warning: practitioners should reflect on whether manipulating incidental guilt to grow SRIs is actually ethical in itself.