Sustainability Preferences of Index Fund Investors: A Discrete Choice Experiment

The rising trend of integrating sustainability into portfolio strategies is seemingly at odds with the goal of index investing. This is because socially responsible investments (SRI) usually involve some screening. In this study, we demonstrate a method to effectively measure sustainability preferences. Using this method, we show how index fund investors cope with the conflict between index tracking and the pursuit of sustainability. We measure the willingness-to-pay for sustainability in an online discrete choice experiment (DCE) with real index fund investors. On average, our participants are willing to pay for sustainability but are insensitive to ESG intensity. They prefer the negative screening strategy, but are indifferent among other ESG integration strategies. In the meantime, our latent class analysis shows considerable heterogeneity among investors in their sustainability preferences. These results are validated through demographic information, survey responses, and choices in an incentivized portfolio allocation. Our results contributes to the understanding sustainability preferences. Our method is potentially applicable when financial institutions assess their clients’ sustainability preferences.