Sustainable Investing: Navigating the Inefficiencies of an Inefficient Market

Over the past decade, sustainable investing, also known as socially responsible investing, ethical investing, or responsible investing, has experienced heightened popularity worldwide. This popularity reflects the increasing awareness of investors of social, environmental, ethical, and corporate governance issues. However, while retail investors\u27 interest has increased, their actual participation has been nominal. This paper explores the question: How do individual investors incorporate sustainability-related experiences, information, learning, or a combination of these in deciding to invest in sustainable investments? This study aims to identify the barriers and enablers that may inhibit or facilitate participation in sustainable investments. The study follows a grounded theory approach to construct theory from data, a method appropriate for this situation given the paucity of research involving investors\u27 intentions but lack of execution in sustainable investing. Furthermore, the study uses Behavioral Decision Theory and Nudge Theory as conceptual frameworks to structure the collection and analysis of data. The study entailed an extensive review of extant literature and promoted data collection through an intensive interview process involving knowledgeable investing and sustainability professionals. The findings identified several uncertainty drivers involving investors’ attitudes towards rating and reporting agencies, the financial merits of sustainable investing, and concerns about greenwashing. Each of these contributes to inefficiencies surrounding sustainable investing. These inefficiencies include asymmetric information, market power, market friction, and externalities. These uncertainty drivers and market inefficiencies promote investor responses through options unavailable to traditional investors. Contributions to theory include confirmation and extension of extant literature, enhanced function of behavioral decision theory and nudge theory, and extended application of market inefficiencies. Contribution to practice involves a conceptual model around strategic option theory for sustainable investing and the application of BDT and nudge. From these, individual investors, investment advisors, and investment companies can make more insightful decisions in their investment strategy to increase participation in sustainable investments