Cognitive Biases and Corporate Climate Change Inertia

Why are so many organisations failing to adjust their strategies to become more sustainable? One of the reasons lies in the cognitive biases at play in corporate decision making, as explained in this summary of the ‘Sleepwalking into Catastrophe’ article published by the California Management Institute and written by Daina Mazutis and Anna Eckardt.

“Climate change is the defining issue of our time”, said then UN Secretary-General Ban Ki-moon. And yet, most businesses continue to sleepwalk into climate disaster.

The failure of organisations to recognise climate change as a moral issue

One of the silent culprits behind unsustainable business behaviour in general lies in the failure of organisations to recognise climate change as a moral issue. This is a significant strategic error, caused by influencing factors that previous research identified as being the short-term logic of the market, regulatory uncertainty or the lack of experience of managers.

A moral issue is any issue whereby one’s actions, when freely performed, may either harm or benefit others or infringe on another’s rights. Climate change, and its anthropogenic roots, poses inherent risks to human, animal and ecological health and well-being. 

Given such obvious harms, the moral principle of ‘do no harm’ is central to many arguments. And yet, the moral implications of climate change inaction have still not been seriously discussed in the business context. 

A number of factors define a moral issue in terms of its intensity, such as:

  • Magnitude of consequences: the sum of the harm/benefits of the issue

  • Concentration of effect: the strength of the consequences

  • Probability of effect: the probably that the issue will actually take place

  • Social consensus: the degree of social agreement on the issue being good or bad

  • Temporal immediacy: the length of time until the consequences of the issue

  • Proximity: the feeling of immediacy (both psychical and psychological)

When businesses fail to recognise an issue as moral, and instead rely purely on an economic logic, there can be very real financial, legal, and social consequences.

In the last few years, there has been an upsurge of popular books that describe the role of cognitive biases or heuristics in everyday human decision making processes. In the case of climate change, these biases lower the moral intensity of the issue such that the moral consequences of inaction aren’t given enough importance in corporate decision making processes. 

In particular, the moral intensity of climate change remains low within a business context due to four categories of biases that prevent organisational decision makers from seeing the severe consequences of continued climate inaction:

1. Perception biases: the “What problem?” problem

Such biases influence how we perceive climate change in the present moment, therefore impacting the problem identification phase of the decision making process.

Perception biases have their roots in people’s inability to conceptualise events and consequences that they haven’t yet experienced. Here are three forms of perception biases, together with corresponding solutions:

ISSUE FRAMING

Problem: people respond differently and often rationally to an issue based on how it’s presented. As an example, using the term ‘climate change’ frames the problem as more controllable and less emotional than ‘global warming’, reducing the urgency to act. More generally, climate change is often framed as distant in time and place, with vague effects and consequences.

Solutions: the good thing is framing can be used in the opposite way too. For instance, by presenting its negative effects on resources with a greater level of certainty or by highlighting the potential losses to profits. 

AVAILABILITY HEURISTICS

Problem: people tend to prioritise information that is more vivid or salient when evaluating a specific topic or decision. That means that events that are perceived as less plausible or tangible, like the impact of climate change on an organisation, will have less weight on the organisation’s decision-making process. 

Solutions: examples of mitigating strategies include using nudges that make the magnitude of consequences more readily available, like thermostats that tell you the cost of running an air conditioner. Or using simulations and experiential exercises, as they temporarily force people to behave differently. For instance, temporarily forcing car drivers to use alternative modes of travel can lead to long-term reductions in car use.

AFFECT HEURISTICS

Problem: people tend to minimise the perceived risks and exaggerate the perceived benefits of things they like, and vice versa. This is particularly true for decisions being made under conditions of uncertainty. When confronted with information about the need to change aspects of the business in order to account for climate risk, people are likely to overemphasise the risks and harms associated with the new plan.

Solutions: a mitigating strategy is scenario planning i.e., assessing at least three risks and benefits of different climate change scenarios. Another one is the vanishing options test, asking “What if we couldn’t continue with business as usual, what else could we do?”

2. Optimism biases: the “We’ll be OK” problem

Humans have the tendency to be overoptimistic about the outcome of planned actions and overconfident in our ability to deal with the likelihood of negative events.

This helps protect our self-esteem and makes us more resilient during tough times but it can lead to underestimating the probability of climate change effects. Here are two forms of optimism biases, together with corresponding solutions:

OVERCONFIDENCE

Problem: people tend to have positive illusions about the world we will live in the future as well as an optimistic view that technology will bring our salvation. For instance, people have a strong belief in technology and in the human capacity to mitigate the consequences of global warming through innovation and entrepreneurship. “It’s an engineering problem, with engineering solutions.”

Solutions: using pre-mortem and back-casting techniques can help identify possible faults in our logic, for instance considering a worst-case scenario. Taking an outside view can help too, countering excessive optimism, for instance by conducting benchmarking visits to best-in-class sustainable organisations. 

SELF-SERVING BIAS

Problem: people seek outcomes that are favourable to themselves or their company first, at the expense of the common good. When generating strategic alternatives, people therefore unconsciously limit their decision set to only those options that benefit the organisation, regardless of the ethical implications to others. “The business of business is business.”

Solutions: including stakeholder perspectives on important sustainability issues can help gain a broader perspective. And joining industry-level sustainability coalitions can mitigate the perceptions of competitive disadvantage for those taking the lead and therefore increasing their expenses. Embracing, or even rewarding, failure can help encourage innovation by reducing the impact of negative feedback on self-esteem.

3. Relevance biases: the “2 degree, 30 year” problem

Relevance biases reduce our understanding of the importance of a healthy climate to our future.

Managers tend to interpret the future in a way that minimises or ignores the dramatic consequences of climate change on future operations. Here are three forms of relevance biases, together with corresponding solutions:

ANCHORING

Problem: people rely too much on an initial piece of information offered when making decisions. This is especially problematic in the context of climate change. For instance, talking about increases of 2°C and 5°C in global temperatures can appear as relatively small and inconsequent for a lot of people. 

Solutions: one of the easiest ways to counter anchoring biases is to change the anchor and tailor it to your local context. Establishing stretch targets could help too, focusing on ‘gold standard’ goals instead of incremental changes - for instance Net-Zero instead rather than CO2 emission reduction. 

TEMPORAL AND HYPERBOLIC DISCOUNTING

Problem: people tend to prefer successes that are close in time over distant ones. This makes adapting to climate change unattractive as it requires immediate efforts and sacrifices for benefits that will come later and are uncertain.  

Solutions: changing the signpost could help. For instance, Unilever has eliminated quarterly reporting, leaving more room for the slower, longer-term progresses that sustainability requires. Another solution is incorporating long-term climate change objectives in performance scorecards. 

QUERY THEORY

Problem: immediate consumption is often more attractive that delayed gratification, and most people fail to take into account the future consequences of their immediate actions. Today, there are few companies that would risk sacrificing immediate benefits for the sake of abstract and uncertain goals such as avoiding the catastrophic impacts of climate change.

Solutions: changing the order in which items are discussed in agendas can help. For instance, by first working to find arguments for climate change mitigation before considering arguments against. Another solution is to implement joint evaluation: when choosing between alternatives, ensure that both financial and social/environmental gains and losses are presented simultaneously. 

4. Volition biases: the “It’s not my problem” problem

Volition biases prevent people from assessing themselves as independent agents with control over particular actions.

This prevents them from thinking about or making choices related to sustainable corporate practices. Here are three forms of volition biases, together with corresponding solutions:

DIFFUSION OF RESPONSIBILITY

Problem: the health and well-being of the people and the planet are seen as the responsibility of the state and some other civil society players. And businesses continue to operate under the erroneous model of unlimited resources, causing a free rider effect.

Solutions: thought experiments, where asking what the business could do replaces asking what the business should do can lead to a broader range of possible solutions and more effective outcomes. 

OBEDIENCE TO AUTHORITY

Problem: industry standards and environmental regulations lock corporations into a focus on strict legal compliance rather than the attainment of proactive goals. Doing anything more than what is required by law would be seen as deviant.

Solutions: recasting the authority can help, for instance invoking broader authorities like the UN or society. “The role of business is to serve society”, said Lord Lever. Or appointing a devil’s advocate that questions the status quo. Another solution can be to introduce an altruistic role model who incite those around them to behave in a positive manner. Or assigning positive identity labels to divisions tackling climate change issues. 

PROFESSIONAL BIAS

Problem: business people tend to believe that adopting more aggressive climate change initiatives than mandated by the law would put a company at a competitive disadvantage. This is because professional business standards, which still stress the shareholder maximisation norm, pit financial objectives against social and environmental impacts. 

Solutions: mapping out all of a company’s goals beyond maximising shareholder value is a way to counter professional bias. Invoking other identity frames such as innovation or history could be a way to alter behaviour. Last but not least, invoking social norms could help: for instance, instead of focusing on competitors that continue with business as usual, reference peer companies that have been successful at reducing their emissions above standards.

Conclusion

As a conclusion, the role of cognitive biases on corporate climate change inertia should not be underestimated. They can have a profound impact on sustainability-related decisions. The good news is that a number of mitigating strategies exist, and if applied correctly, can help businesses avoid sleepwalking into a climate catastrophe.

Read also: the interview of Olivier Sibony on Corporate Decision Making and Sustainability

REFERENCE

Mazutis, D., Eckardt, A. (2017) Sleepwalking into Catastrophe: Cognitive Biases and Corporate Climate Change Inertia. California Management Review, 59(3). pp. 74-108. https://journals.sagepub.com/doi/10.1177/0008125617707974