Sustainability Preferences: The Role of Beliefs

Trillions of dollars flow into socially responsible investments (SRIs), yet it is unclear how investors trade off sustainability with financial performance. To formally evaluate this, we need a reliable method to elicit investors' belief towards the financial performance of SRI, which is still lacking in the literature. In this paper, we formally investigate investors' expectations towards funds' financial performances associated with Environmental, Social, and Governance (ESG) labels through an incentivized field survey experiment that compares three different belief elicitation methods, two incentivized and one unincentivized. Our findings from both incentivized methods suggest that knowledge of a fund's high ESG rating on average positively influences return expectations. This is in contrast to the same group of participants' answers to the commonly used unincentivized Likert scale question. Furthermore, return expectations towards high ESG funds elicited by the incentivized methods are positively correlated with allocation to sustainable funds in an incentivized allocation task. This implies that unincentivized methods of eliciting ESG-related beliefs may be systematically biased. Our research contributes to understanding investors' motive for engaging in SRI, and practically dissecting sustainability preferences.