Critical Role of Trust in Sustainable Investing

Catastrophic news of floods, wildfires, record temperatures and rising sea levels highlight the urgent need to support and fund sustainable business practices. However, despite high profile climate action initiatives (e.g., those from COP 28), capital allocation towards positive environmental, social and governance (ESG) practices still represents less than a third of global funds under management. The barriers to making the necessary shift towards environmental and social progress include a lack of trust in investment professionals and products. In particular, our aversion to betrayal holds us back from trusting and engaging in sustainable investments. This aversion is understandable given the risk of greenwashing and corporate failure in accurate reporting on ESG metrics. This research article develops an innovative adaptation of the behavioural trust game to the context of sustainable investing. We measure the extent of trust and trustworthiness in association with sustainable investing amongst the professional investment community—including institutional portfolio managers, investment advisors, and ESG rating agencies. We conduct a trust experiment and test the responses directly and through regression analysis. The results show trust is higher in the context of sustainable investment decision making than normally occurs in trust experiments. Our results also indicate that trust and trustworthiness influence sustainable investment preferences. While trust was not directly reflected in participants’ own sustainable allocations, it was a strong predictor of the allocations they made for others. Trustworthiness also had a positive effect on sustainable investing choices. Although preliminary, we believe this study may contribute to our understanding of trust issues in association with sustainable investing. In particular, these findings lay a foundation for future empirical research to enhance trust in investment decision-making. We hope this research will lead to the creation of genuine trust. However, we also note that this will require change in the industry—e.g., ethical conduct, transparency, and a demonstrated commitment to responsible investing.