Rethinking ESG

This chapter critically examines Environmental, Social, and Governance (ESG) investing through the lens of behavioural finance, challenging the prevailing notion that sustainable investment decisions are consistently ethical, rational, or evidence-based. While ESG frameworks are widely celebrated as a moral and financial evolution in capital markets, empirical data and real-world case studies reveal that investor behaviour is often shaped by cognitive biases such as moral licensing, cognitive dissonance, and framing effects. Using global illustrations and original survey data from Southeast Asia, this chapter demonstrates how superficial heuristics, identity signalling, and bounded rationality create a significant gap between ESG ideals and actual investment conduct. It proposes a conceptual and policy framework to address these psychological inconsistencies through education, regulatory clarity, and behavioural design. It calls for a greater integration of behavioural insights into ESG governance, research, and practice to ensure the integrity and effectiveness of sustainable finance.