Sustainability Preferences: The Role of Beliefs

Trillions of dollars flow into socially responsible investments (SRIs), and yet how investors trade off financial performance for sustainability is unclear. To formally evaluate this trade-off, we need a reliable method to elicit investors’ beliefs about the financial performance of SRI, which is still lacking in the literature. In this study, we formally investigate investors’ expectations for funds’ financial performances associated with environmental, social, and governance (ESG) labels through a field survey experiment in which we compare three different belief elicitation methods: two incentivized and one unincentivized. Our findings from both incentivized methods indicate that knowledge of a fund’s high ESG rating on average positively influences return expectations. This is in contrast to the same participants’ answers to the unincentivized Likert scale question. The difference is likely just driven by the incentive, but not the question format. Furthermore, return expectations for highly rated ESG funds obtained from the incentivized methods are positively correlated with allocations to such funds in an incentivized allocation task. Taken together, our results suggest that the incentivized methods elicited beliefs that were closer to participants true beliefs. Our research contributes to understanding investors’ motive for engaging in SRI and to practically dissecting sustainability preferences.