Socially responsible investments (SRIs) increase exponentially, from $2.0 trillion in 2012 to $12.0 trillion in 2018, which means more than one out of every 4 dollars in the United States was invested in SRIs. Why do investors hold SRIs?

Investors who hold SRIs are usually characterized by altruism. For example, researchers find that SRI investors are likely to forgo some profit to do good to society in many survey studies of sustainable investing. In the surveys, investors are asked about the SRI financial performance compared with non-SRI by a Likert scale question. For instance, the question is: I expect that the returns of socially responsible equity funds compared to conventional equity funds are: 1=much lower, 2=a bit lower, 3=the same, 4=a bit higher, 5=much higher. To the survey result, SRI investors are relatively pessimistic regarding the performance of SRI funds, which indicates that SRI investors sacrifice the profit of their investments to pursue high sustainability.

However, this may not be the complete picture, and the survey result on the Likert scale could be systematically biased. On the one hand, those who have already invested in SRIs are likely to be more optimistic about SRI performance because that justifies their initial investment decisions and enhances their self-images as sophisticated investors. However, on the other hand, they are also likely to understate the performance of SRIs in order to emphasize their prosocial preferences, like altruism. That is, they invest in SRIs not because of money. Thus, the obtained investors’ beliefs towards SRI performance by the unincentivized Likert scale may not match their true beliefs. Furthermore, there is no consensus in the literature as to whether SRIs have a superior financial performance to non-SRIs. Therefore, investors’ beliefs toward SRI performance play a substantial role in SRI decisions.

Meanwhile, apart from the social preference approach, alternatives could be considered. First, the market is full of uncertainty. Thus, investors are far from having a clear idea of the probabilities of outcomes. This is a situation called ambiguity. Like risk preference, investors have various attitudes towards ambiguity, mostly with varying degrees of aversion. SRI is connected to investors’ ambiguity attitudes because SRI, as a new, widely adapted concept, could be perceived as a label to reduce the ambiguity in the market from the aspect of sustainability. And investors tend to hold SRIs because it resolves ambiguity in the market at least along the dimension of sustainability, even though they may not have a clear clue about how this relates to financial returns. Second, the social norms following could be another alternative explanation for the inclination to invest in SRIs. For instance, people drive and even tend to walk on the right in most countries but on the left in some countries, like the United Kingdom. This is a social norm. People follow the norm not because they have a preference for walking on the right or the left but because they want to stick to the norm without causing problems. When it comes to investing, it is probably also plausible if SRI is the norm and those who invest in SRIs have a higher tendency to follow the norm but not care about the actual societal or environmental impact.

To investigate the above alternatives, we (Rob Bauer, Peiran Jiao, and Bin Dong) launch a project to examine investors’ true motives for SRI. We conduct a lab experiment to adopt novel methods to elicit investors’ beliefs, ambiguity perceptions, and norm-following propensities on SRIs. We randomly assigned 320 subjects equally to two groups, the SRI group, which gives SRI information about a fund of SRI, and the non-SRI group, which doesn’t provide SRI information about the same fund. We compare the subjects’ beliefs, ambiguity perceptions, and the norm following propensities of SRI between the two groups. To solve the problems mentioned above in belief elicitation in the Likert scale surveys, we first ask an investor to state the maximum and minimum possible expected return of a fund during some future periods. Then we ask them to repetitively divide this state-space into equally likely subspaces by choosing between two lotteries. We keep asking for these choices until a desired level of precision is reached, and by doing so, we obtain the investor’s median expected return of the fund. We also use the same unincentivized Likert scale survey question in the extant literature to elicit subjects’ beliefs to compare with the results of our designed novel belief elicitation method. To make it harder for respondents to identify the purpose of the study, game the system, or hedge, all the questions are incentivized and disguised as choices between lotteries. Moreover, we also design novel methods to elicit ambiguity perception and norm-following propensity.

Interestingly, in our project, we find that subjects expected superior financial performance on SRIs than non-SRIs, which contradicts their answers to the Likert scale survey question. Meanwhile, subjects perceived less risk of SRIs. These findings suggest that subjects believe SRIs could achieve a higher Sharpe ratio than non-SRIs. Moreover, we find that subjects perceived less ambiguity towards SRIs and had a high norm following propensity when it comes to SRIs. The above findings indicate that investors’ financial motives play a substantial role in the decision to hold SRIs.

Therefore, it is necessary to further distinguish SRI investors into two categories: social preference drive investors, who derive more non-financial utility through SRIs, and performance drive investors, who derive more financial utility through SRIs. Practitioners, such as funds, rather than only resort to investors’ social preferences, should consider investors’ beliefs, ambiguity perception, and norm-following propensity towards SRIs to achieve precision marketing. That is, they can not only design products that cater to the specific demand of different segments of investors with heterogeneous beliefs and preferences but also apply different marketing strategies to attract the appropriate clients. Understanding investors’ true reasons for investing in SRIs will also have important policy implications. This can, for example, help policymakers design policies to promote SRI, such as preferential tax policies, and attract more investors to engage in sustainability. Overall, SRIs could be ideal for investors to achieve both wealth and fame.