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Volume 6: Nudge Theory

22 Nov 2024

Inside this volume:
Industry updates
The Practice of Nudges
A Nudge in Energy Consumption
Nudging for your personal health
Media recommendations

Nudge Theory 

 

Industry updates: 

The outlook of the ongoing Cop 29 conference 

Many people criticise the ongoing conference for being hosted in Baku the capital city of Azerbaijan which is a state with strong ties to oil and natural gas. Political discord concerning fossil fuels continue in the wake Trump’s presidency. There were even discussions raised by Cop 29’s chief executive about investing in oil and gas! The effects if ESG scepticism are pervading into the sphere of global governance which will have major future impact on climate change. Countries straddled between acting in their own economic self-interest or in protection of the environment. The behaviour of countries, however, is often determined by other powerful states such as the US. 


Government is going ahead with its plan to regulate ESG rating providers

 

The labour government has decided to create a regime to impose stricter regulation on ESG rating providers affecting things such as the descriptions of ESG ratings, making them more transparent. ESG ratings providers collect and analyse large sets of data on the ESG goals of companies, and they then report on it. This government initiative will boost investor confidence and will reduce green washing. These regulations will allow for investors to identify which companies have more accurately strong ESG policies. 


In the upcoming Retail 2025, companies are taking ESG very seriously 

Companies are starting to realise that there are more benefits for them to take ESG more seriously as opposed to prioritising profit alone. Retail 2025 is a set of trends that are expected to influence the market in the next year. This shows that there is a positive change towards sustainability and social sustainability within companies 

Vietnamese banks are prioritising ESG considering the COP 29 conference 

Despite scepticism about climate change being evident, the move towards collective action persists. Banks in Vietnam historically have prioritised the governance pillar of GSD while neglecting the social and the environmental. Ly Thu Nga, team leader of the green Financial Sector Reform Component of the Green Growth Programme at the GIZ (German Development Agency) in Vietnam has learned some valuable lessons from study tours around Europe where the implementation of sustainable development strategies are providing opportunities for green business growth. This shows there is still a global move towards becoming more sustainable although this movement may be slow. 

 

Longer article: 

The “homo-economicus” has often, if not always been the main assumption of character in economic theories and problems for analysts and schools. A presumption that in every transaction, an individual will always act rationally and pursue only the most fruitful outcome with self-interest in mind. Whilst its simplicity is a strength in deriving many key economic theories in history, many have also noted its shortcomings - particularly the failure to address a more realistic outlook on human behaviour, irrational, lazy and unconsciously driven by other desires. 

Hence, in recent decades the concept of a “Nudge,” or “Nudge Theory” was developed by Richard H. Thaler - a key contributor to the field of behavioural economics and 2017 Nobel prize winner, as well as Cass R. Sunstein, a key administrator and public policy maker through several presidencies in the White House Office.  

 

The Practice of Nudges 

The use of Nudge theory aims to help people make better decisions through understanding and subsequently predicting the psychological behaviour of individuals. It aims to “nudge” them in a direction which is most beneficial to themselves and society, whilst still retaining their overall freedom of choice. These nudges are often inexpensive or free to establish within society as the utilised methods are often less directly invasive, rather simple changes, such as changing the colour coding on the vegetable aisle in the supermarket to make them appear more enticing or noticeable, to changing the language used in conveying one’s energy consumption bill to reduce their usage. Despite its simplicity in design, nudges have been successful on a wide scale in a multitude of cases.  

 

A Nudge in Energy Consumption 

The world, and in particular the US’ energy sector has a heavy carbon footprint with 73% of global greenhouse emissions being attributed to energy consumption. Oracle, previously known as OPOWER, is a software service platform which provides customer engagement details in use of certain utilities, utilising nudges to reduce energy consumption. As early as 2007, 80,000 households in Minnesota monitored under OPOWER, received personalised energy reports each - Subsequently leveraging the power of social influences by comparing people to their neighbours' energy usage, also detailing the more “energy efficient” neighbours and how much money one could save by following this role model. 

 

Since 2007, over 17 million American households have received such reports, saving 11 billion kilowatts of energy, enough to power stadiums for 40,000 World Cup football matches. Cumulatively, consumers also have saved around $2 billion (about $6.2 per person) US dollars with a simple nudge. 

In this case, the social norms of neighbourhoods were shifted, by making the desired behaviour, the perceived behaviour. It is notable that people will attempt to replicate actions and behaviours of those they admire, especially when certain countries possess a strong cultural norm of conformity - The need to do the “socially correct” thing and be perceived in a positive light speaks to the extent in which social perception plays an important role in the decision-making process. 

 

In this regard, a field study carried out in California looked at how injunctive messaging (which is designed to inflict a sense of judgement upon one’s behaviour and actions) would influence positive a response. WaterSmart Software, a firm in California that works with public utilities to reduce household water use, monitored around 46,000 households. Each household would be split into a randomised allocation between 4 control scenarios, ranging from no social or visual cues to an injunctive message included with visual cues. This was represented through a smiley, neutral, or frowny face inside a water droplet image, depending on the household's water consumption. WaterSmart would send a series of 6-7 emails to each household, recording recent changes in the water meter readings. Results showed that injunctive messaging played a crucial part in the efficacy of water conservation and direct emails made households more reachable. The constant need to stay updated with social media platforms and trends may serve as a simple gateway for future use of nudge in different industries not just locally but globally, to convey a socially desired behaviour. 

 

Nudging for your personal health 

Notoriously, governments and policy makers' attempts to encourage the individual to personally prioritise their health often still leave uncontrollable shortcomings. Alcoholics and smokers, whilst deterred by higher prices in the short run, find difficulty in repelling an addictive impulse to consume overall due to heuristics which naturally drive humans to repeat old habits, paradoxically causing more harm in attempts to prevent harm. 

 

Whilst benefitting one’s health, it can also be effective in steering consumers to a certain choice. One example may be nudging to guide consumers food choices in restaurants towards more sustainable vegetarian and plant-based meals – simultaneously increasing sales and popularity of plant-based meals. Researchers conducted such a study on 2 different 5-star restaurants in London, making use of a “transparent nudge” in their menus. It was found that removing the symbols that define “vegetarian” or “plant-based” dishes, whilst including a “low-emission” symbol and being transparent regarding such choices demonstrated a simple, yet cost-effective strategy to tackle the unsustainable food consumption problem in the hospitality sector whilst leaving the consumer free to make the final choice.  

 

Despite the clear benefits of Nudge Theory in influencing consumer behaviour, key questions arise when considering the morality of subtly manipulating individuals’ decisions. To explore the ethics of Nudge Theory, see this paper by Engelen et al. : The ethics of nudging: An overview - Schmidt - 2020 - Philosophy Compass - Wiley Online Library 

 

In conclusion, it’s exciting to see how Nudge Theory can be leveraged in the wider ESG movement. From the potential to influence a “greener”, more sustainable mindset in areas such as energy conservation, to businesses moving people away from socially damaging habits such as alcoholism. Nudge Theory clearly has the potential to allow socially responsible businesses to create large-scale societal change. If used appropriately and with more time to discover more efficient ways to “nudge” others, ‘nudging’ can help move us towards a more sustainable and equitable future. 

 

 

 

Media recommendations:  

I have really enjoyed this Linklaters podcast series. It’s super interesting and I love how it covers so many different areas of ESG. I’ve found it especially helpful for breaking down complex ideas and technical terms into a form that I can understand what’s going on! The series is available on platforms like Spotify, go check it out! 

https://www.linklaters.com/en/insights/publications/environment-social-and-governance-series/esg-media-hub  

Ambra 7/10 

 

I was super interested by this week’s topic on Nudge Theory. This podcast goes into more detail on this subject as well as explaining more behavioural science in general. I loved how the podcast gives applicable everyday uses of how Nudge Theory can be used in the real world. I would highly recommend this to all those interested in behavioural economics and its role in ESG. 

https://www.nudgepodcast.com  

Ambra 8/10 

 

A 3rd and final podcast for all of you podcast lovers! The ESG Insider podcast from S&P Global is a super insightful podcast which recently put out this podcast diving into why businesses and companies are talking so much more about biodiversity at this year’s COP. Biodiversity is something I had never realised was so important! Listen here!  

https://www.spglobal.com/esg/podcasts/ 

Ambra 8/10 

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