Behavioural Finance and ESG: Current Landscape Summary

In recent decades, against the backdrop of significant growth in the investment market, investors have increasingly sought ways to generate favourable returns. While traditional theories such as portfolio theory provide an analytical basis for investment decisions, these approaches often neglect the psychological factors that shape investor behaviour. This literature review explores the importance of behavioural finance: it focuses on how psychological biases can influence investor decisions. By analysing research published between 2000 and 2024, this paper focuses on four key biases – overconfidence, loss aversion, herd behaviour and confirmation bias – and assesses how they influence investor attitudes and investment intentions, particularly in relation to environmental, social and governance (ESG) factors. The review draws on a variety of academic articles and empirical studies to determine how these biases manifest themselves in both institutional and retail investment contexts, ultimately shaping outcomes that may either promote or hinder sustainable investment strategies. These findings contribute to a nuanced understanding of investor psychology. In addition, the article provides actionable insights for investors and a roadmap for future research on bias-mitigation tools such as AI-driven analytics.