Understanding Investors’ ESG Preferences: Beliefs, Ambiguity Attitudes and Social Norm

ESG (environmental, social, and governance) factors increasingly attract a tremendous amount of capital and investors’ attention. However, a complete understanding of the underlying drive for this pursuit for high ESG is still lacking to date, both theoretically and practically. The literature so far has solely focused on social preferences, whereas in this project, we propose and investigate a number of important and plausible explanations.

We will launch a field experiment. First, we randomly separate investors into two groups and show them a randomly selected high ESG fund's past annual returns. The intervention group is told the fund's ESG rating is high, but the baseline group doesn't know the fund's ESG information. Then, we measure two groups of beliefs, ambiguity perception, and social norms by adopting novel quantitative methodologies to a survey experiment. Theoretically, we propose investors’ beliefs towards superior performance, lower perceived ambiguity, and norm following of high ESG investments as alternative explanations. Practically, we construct and validate a design to elicit such beliefs, ambiguity perceptions, and social norms efficiently and scientifically.

Our findings will have significant implications for financial institutes and policymakers. For instance, the methods we develop can provide a profiling tool in terms of understanding the true ESG preference of investors, and for policymakers that strive to promote socially responsible investment (SRI). In the meantime, we will also profile index fund investors, in order to find out how they are similar or different in characteristics from other investor classes.