93 What does behavioral economics say about challenges in implementing CSR / ESG issues?

Economists in recent decades have developed additional theories that may help explain consumer, and company, behavior. These insights are rooted in psychological research into human behavior. Each of the following illustrate reasons why implementing CSR / ESG issues is challenging.

• (1) Information salience: People tend to weight recent events more highly in their decision making. People may be shocked at news of child labor, collapsing garment factories, or mistreatment of animals, yet that information only remains at the forefront of most people’s thoughts for a short time. After that, they revert to established behaviors. For example, one might view the documentary Food, Inc. and worry about factory farms, but buying harder-to-find or more expensive free-range beef might be a short-lived habit.
• (2) Heuristics / Rules of thumb: Once people establish a purchasing habit, that habit tends to stick. An internal rule of thumb that Product X meets one needs makes it difficult to switch to Product Y. This gives products inertia, despite having problems with CSR / ESG issues.
• (3) Addiction: Body chemistry nudges us towards selecting certain products, based on sugar content, caffeine, and other factors. If a consumer believed that coffee production was negative in certain ways, they may have a difficult time switching away from its consumption.
• (4) Hyperbolic discounting: People tend to choose an immediate reward over a later, larger reward. This is one reason why losing weight or raising children is challenging. The immediate reward from a Snickers is hard to balance against the long-term health benefits of celery, particularly when hungry. With children, the long-term reward of family relationships may be hard to balance against the immediate rewards from browsing on a smartphone.
• (5) Framing / Stories: Finally, people respond to events by filtering them through anecdotes and narratives. Rather than rationally calculating costs and benefits like utilitarians, people tend to listen to narratives to make sense of the world around them. For instance, a narrative that housing prices will never go down, which is contrary to history, may help encourage people to buy homes at prices they would not pay under a more rational analysis.

These principles suggest that attempts to improve business behavior face many obstacles. Because businesses responds to consumers, consumers collectively have great power as stakeholders. Yet those consumers may not remember relevant information, rely on existing heuristics rather than changing behavior in response to CSR / ESG issues, may be addicted, and underweight long-term concerns. On the other hand, the framing and stories surrounding CSR / ESG issues may help consumers understand concerns of other stakeholders. The lowering of child labor rates came, in part, due to investigative reporters creating narratives surrounding child labor which people remembered.