As sustainability is having a rough time on the global investment stage, Nordic institutions have stayed suitably committed and most continue on their integration journey, pushing on external managers their demands for better reporting, more concrete commitments and less greenwashing. It is in this context that the organisers of the Global Fund Search’s Annual Symposium in Copenhagen decided to invite a keynote speaker to help the attendees overcome their biases and detect fact manipulation. The gauntlet was picked up by none other than British academic and economist, Alex Edmans, professor of finance at London Business School and author of “May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases—And What We Can Do about It”.
To set the stage, Edmans starts by showing the cover of one of the best selling pop-science books about sleep, “Why we sleep” by Matthew Walker, with a wink and a hint of irony, as we are listening to his talk just after having enjoyed a highly satisfying lunch. This book, Edman points out, tries to prove a point we all hope to be true: that sleep is important and more of it is better than less. Exhausted investment bankers, he assumes, would be particularly glad to show this kind of evidence to their boss in the hope of making a convincing argument to be let home earlier than 3 am. To prove this point, the book’s author shows the result of a study that evaluated the correlation between risk of injury and sleep duration. The graph that is reproduced in the book conveniently shows a strong negative effect: for every sleep hour lost, the risk of injury increases, all the way down to 6 hours of sleep, where the rate of injury is the highest. The problem with this example, Edman shows, is that the underlying data is only partially displayed in the book. Walker cut off the left-most bar of the bar chart, which shows that with 5 hours of sleep, the rate of injury is, counterintuitively, lower than for both 6 and 7 hours of sleep. Because the data didn’t support his claim, he decided to leave it out.
This type of manipulation, Edman argues, is common and humans have a tremendous ability to engage in this practice quite naturally and even unconsciously. Confirmation bias is what happens when we seek and tend to lend a higher credibility to statements or data that supports our existing beliefs. The corollary to this bias is that we are particularly critical and suspicious towards evidence that disproves our existing beliefs. In other words, we are easily entrenched in our existing convictions and it is very difficult for us to change our minds, even when provided with underlying proof.
To help us in distinguishing the fallacies that we are prone to, Edmans shows us a ladder which features five steps where confusion typically occurs and explains how we can ask the right questions to avoid being misled. For example, the first rung, labelled “statement” must be distinguished from the second run, labelled “fact” and so on to the top. Similarly, a fact does not equal data, data is not evidence and evidence is not proof.
For more explanations on this framework, I would definitely encourage you to read Edman’s well-written book (of which GFS generously offered the audience a copy) or to listen to his TED talk. But for now, here are the thoughts I take away from this framework, which I find very useful indeed. It is not as though any of this is entirely new to us, of course. Anyone who has been an investor has experienced biases, especially in the way we treat information when we are analysing a future holding or an existing holding. Typically, if you already hold a stock (or bond, fund, etc ) in your portfolio, it is natural to be drawn to positive analysis about the stock (especially if you have just bought it), whereas if you are not yet holding the asset, you might be much more sceptical.
These biases also hold true when it comes to sustainability and Edmans provided examples in the context of DEI. I strongly believe that one of the main issues with sustainability in general (and Edman agrees) is that it is difficult to define in a universal manner. What is sustainable is different for different people. This is one of the reasons “ESG” was first coined, so that a clearer definition could be adopted. But instead, over time, ESG became a synonym for sustainable investing and even just responsible investing. It is very difficult to prove something is working when the concept is poorly defined and it is also easy to discredit something by pointing to the lack of proof. As Edmans also cites, the absence of evidence is not evidence of absence. While that is true, we often tend to fall for these sorts of arguments as well.
Ironically, this reminded me of the keynote speaker GFS featured at the same event last year. Björn Lomborg, it seems to me, is a master of using the fallacies Edmans is warning us about. The technique known as generating “FUD” (Fear Uncertainty and Doubt), which is very familiar to big industry (big tobacco, big oil, big plastic, big beef, you name it), is often used as an effective detergent when engaging in any type of “washing”. Adopting Edmans’s technique is a good start to protect yourself against these tactics.
Take the alleged ploy by some over-eager asset management marketers engaging in green- or impact-washing, for example. In his framework, Edmans proposes a list of questions to test each of his ladder’s rungs:
- A statement is not a fact; it may not be accurate → check the source: What was said? what was measured?
- Facts are not data; they may not be representative → don’t fall for cherry picking – check the full picture: Are there others who share the same characteristics who failed? Are there others without the same characteristics who succeeded?
- Data is not evidence; it may not be conclusive → check for rival theories: What would you think if you were holding the opposite opinion or if you hadn’t already invested in the asset?
- Evidence is not proof; it may not be universal → check the context: Is the setting or the range representative? Can it be replicated?
Most of these steps can seem quite trivial, especially because of the inherent scepticism that has been surrounding “impact”-claiming funds. The EU regulation has also been focused on preventing some mislabelling, especially when it comes to the first rung: if you claim you are sustainable, you need to choose the degree of sustainability you are claiming and then conform to some minimum standards. It is not perfect, but at least it has set some boundaries (between SFDR article 8 and article 9 funds) which were previously rather permeable.
Over the years, however, I have come across some interesting cases that illustrate more subtle marketing tricks further up the ladder. For example, it is not uncommon that managers cherry-pick successful engagement cases. They will show how conversations with companies have allegedly led to positive outcomes. What they don’t always demonstrate, however, is whether the change would have happened anyway without their intervention, whether the change was entirely intended from the start and didn’t just happen by chance, and whether this method of engaging is replicable with a high rate of success and isn’t just a one-off. Because we are so convinced (or hopeful) that positive engagement or “soft-activism” is a successful stewardship tool and leads to positive sustainability outcomes, we tend not to push too much on these questions. This could leave the door wide open to the above-mentioned “FUD” users who will expose one of these exaggerated claims and try to use it as evidence that the entire idea of positive engagement is a hoax.
Beyond sustainability, there is one particular bias that everyone can easily notice in the Nordic institutional market. I’m not pointing fingers at anyone in particular, and this is not a exclusively a Nordic problem, but there are readily available statistics1 that show how Nordic institutions have a much stronger exposure to local asset managers. You may argue that it is perhaps not unreasonable to overweight, say, Swedish equities in a Swedish pension’s listed equity exposure, relative to the global index, and that it is likely that Swedish asset managers are better at managing those types of stocks than international ones. Let’s just accept this hypothesis for now, but let’s also then admit that is unlikely that the global equity exposure will be better managed by a Swedish manager than by an international firm. A global firm can easily access an immense talent pool and throw a lot more resources into the investment process, from analyst teams to risk management tools, not forgetting sustainability analysis and all the rest. So why do local institutions still often favour local managers for their global equity exposure?
One of our most powerful biases is that we trust people we like more than those we don’t. If we are already convinced of the competence of a manager we have met, we won’t need as much evidence to invest in them, as if we had never heard of them before. This is why platforms such as GFS’s search programs can be useful for investors who are trying to avoid their biases. A standardised search can help put all the products on the same footing. And as it appears, some asset owners even ask for RFP results to be anonymised to improve their judgement.
This is not to say that meeting people and opening up for inspiration isn’t essential. To me, the GFS Annual Symposium clearly shows that investors strongly benefit from the opportunity to discuss and confront their biases. And if there is an opportunity to hear opinions that are different from the usual voices of our neighbours and friends, all the better!
1. Evidence can be found for example in the following reports by the IMF (2017) and the OECD (2025)↩
