Where Sustainable and Behavioural Finance Meet

    Stockholm (NordSIP) – NN Investment Partners’ Sustainable Investing Summer Course has become a welcome tradition among many sustainable professionals. For several years now, the course has attempted to help us keep up with the latest research in this continuously evolving area. This year, the virtual interactive sessions are going on a tour. Until 5 October, the course will cruise between renowned universities from Singapore to Berlin and from Brussels to Washington, where high-quality speakers are lined up to talk about a wide range of thought-provoking and pertinent topics.

    First out, on 24 August, is Professor Sumit Agarwal from the National University of Singapore, whose talk discusses the fascinating intersection of behavioural and sustainable finance. The lecture promises to explain which behavioural factors could account for the current disconnect between science and investor action on climate change and suggest ways in which behavioural finance could transform capital flows into ESG.

    Admittedly, it is a vast area to cover in just an hour. Agarwal’s talk moves from topic to topic at a breakneck speed. Much of the climate and social challenges that he describes sound familiar. Yet there is a distinctly Asian flavour to the way he approaches the issues, too. Commenting on the results from last year’s COP26, the professor chooses to quote India’s climate minister, Bhupender Yadav, to illustrate the reasons for toning down the ambition from ‘phasing out’ to ‘phasing down’ coal. Disappointing as it might seem from a European point of view, it is essential to understand that some nations need to prioritise poverty eradication and complex development agendas, he notes.

    “Investors need to realise that sustainability is not orthogonal to profitability,” stresses the professor. “In the long run, a higher survival rate of sustainable organisations is expected, as resilience helps companies to avoid crises and bounce back from shocks,” he explains. Agarwal also seems convinced that the old business logic of “build it, and they will come” applies to sustainability. If you strive to achieve a high ESG profile, the investments will eventually flow your way.

    Moving on to the sphere of behavioural finance, the professor explains at some length the many reasons why financial decisions are often wrong. “If you were rational, you’d probably only be buying sustainable stocks,” he states. “Yet people do not always function as rational agents.” Assessing probabilities is hard, even for trained professionals. We also tend to see patterns in random events and often let emotions cloud our judgment.

    Agarwal’s conclusion will no doubt resonate among asset managers. “I’ll continue to make mistakes, and so will you,” says the professor. According to him, a sustainable investment strategy is not a trivial matter and should be executed with a lot of caution. Some organisations have the resources to do it and at least stand a chance to avoid some of the many biases and other common mistakes investors commit. “So, better get support from professionals to manage your portfolio,” advises Agarwal.

    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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