How does Climate Polarization Shape Green Investments?

apr. 22, 2024

A new study investigates the impact of a Swedish heatwave on both climate change beliefs and retirement investment decisions. In areas with strong support for a right-wing, climate-skeptical party, people became less convinced about climate change and moved away from green investments. Conversely, those in areas with lower support for the climate-skeptical party became more concerned and shifted their savings toward climate-friendly options.

As the world grapples with the effects of climate change, from devastating wildfires in Australia to unprecedented floods in Europe, understanding public perceptions and subsequent financial decisions becomes increasingly crucial. A new study by Swedish House of Finance’s Anders Anderson and David T. Robinson sheds light on how a major climate event influenced Swedish citizens' views on climate change and their subsequent investment behaviors.

Centered on the effects of a heatwave in Sweden, the study offers insights into "asymmetric updating," a phenomenon whereby individuals tend to favor information that confirms their pre-existing beliefs while disregarding information that challenge them. The study sheds light on how major climate events can polarize views on environmental issues and influence green investments, depending on established beliefs and political affiliations.

Sentiment became more polarized after heatwave

To explore how climate change beliefs affected investment decisions, the researchers conducted two large-scale surveys of Swedish households targeting the same individuals, one in spring 2018 and another in fall 2019. These surveys, conducted before and after a record-breaking heatwave in summer 2018, measured changing attitudes toward climate change. The heatwave, which coincided with over 50 wildfires, received extensive media coverage throughout northern Europe.

Their findings revealed shifts in convictions: while the average individual becomes more convinced that climate change is inevitable, the responses were characterized by strongly diverging beliefs. Using detailed Swedish administrative data, they mapped respondents to their voting precincts and examined the influence of political affiliation on these views, particularly focusing on the right-wing, populist Sweden Democrats party, known for its climate change skepticism.

In areas with high support for the Sweden Democrats, respondents showed less concern about climate change and were less likely to support government action against it. Interestingly, while men living near areas of extreme weather events typically became more concerned, this trend reversed in areas with strong Sweden Democrat support.
These results highlight how political polarization can influence public responses to news about climate change, affecting both perceptions and investment behaviors.

Figure 1: Temperature Assessments in 2018 and 2019. This figure displays survey responses to the question: “In the next 20 years, how likely is a one Centigrade increase in global temperature”. Responses are collected for the same 2,561 individuals in 2018 and 2019 and fall on a scale ranging from “Very unlikely” to “Very likely”. The results are presented separately for men and women living in all areas and specifically high SD vote districts .

How did change in opinions impact investments?

Next, the authors connected survey responses with mutual fund holdings within the Swedish pension system, which lets individuals allocate their pension savings across up to five different mutual funds from hundreds available. This system also offers an easy-to-use web interface that helps investors filter funds based on ESG factors and other criteria.

Generally, individuals who grew more concerned about climate change shifted their retirement portfolios towards funds with better Morningstar climate risk scores. However, this shift was primarily seen in areas with low voter turnout for the Sweden Democrats and for people with higher financial sophistication. In contrast, respondents in areas with high support for the Sweden Democrats, who were less concerned about climate change, tended to avoid funds that exclude fossil fuels. Political predisposition and financial sophistication therefore interact when shaping investment decisions.

These findings highlight how political polarization can influence investment behaviors by households in capital markets. As the Swedish retirement system has evolved to include more fossil-fuel exclusion funds, understanding the interplay between individual behavioral forces and market outcomes becomes crucial for academics, market participants, and policymakers, especially as climate concerns intensify.

Figure 2: Heat warnings and political polarization. This map shows areas with above median turnout for the Sweden Democrat party along with the presence of severe heat warnings.