Normalization of Socially Responsible Investing Leads to More Ethics, Attracting Individual Investors. Really?

Abstract

We analyze the current movement of normalization in Socially Responsible Investments (SRI) from a behavioral economic stance. This normalization is driven by several forces based on metrics and standards, such as normative regulations completed by ratings and labels. These approaches appear absolutist and data-driven. They reduce the agency of finance professionals by considering responsible issues and ethics to be universal and non-ambivalent. They might at first absolve finance professionals of the responsibility to perform a thorough and autonomous moral assessment of assets, thus reducing the ethical part of SRI. While ambiguity-averse finance professionals might find comfort in this uncertainty reduction normalization process, it might be detrimental in attracting individual investors toward SRI, as it induces behavioral biases. Namely, we argue that this data-driven normalization will further prime the individual investors to use their deliberative system 2, lowering the salience of the ethical reasoning part of investment decisions. We also posit that this normalization will promote the status quo bias and the statistical victim bias. While well-intentioned, these normalization initiatives could thus inadvertently undermine investment in SRI and paradoxically not meet the need for more responsibility. We propose several pathways to mitigate the potential detrimental impact of this normalization of SRI.