Cracks in the Investor Lens

This chapter examines the cognitive biases that influence Environmental, Social, and Governance (ESG) investment decision-making, showing how investor perceptions often do not align with sustainability realities. Although ESG investing is usually seen as a rational and values-driven process, psychological tendencies such as confirmation bias, availability heuristics, and moral overconfidence often affect portfolio choices in ways that weaken ethical consistency and financial discipline. Using behavioural finance theory, empirical survey data, and real-world case examples, this chapter demonstrates how mental shortcuts and emotional reasoning create “cracks” in the investor perspective, leading to selective ESG engagement, overdependence on labels, and acceptance of ethical contradictions. It argues that tackling these cognitive vulnerabilities is crucial for enhancing ESG integrity, investor education, and policy development in sustainable finance.