Abstract

This paper examines beliefs about the climate impact of green investing by comparing retail investors with academic experts. Using expert views as a benchmark, it finds that retail investors substantially overestimate the emissions impact of typical green funds. These beliefs influence investment choices and willingness to pay, and are revised downward when investors are informed about expert assessments.

Introduction

Many investors select green investment products to achieve real-world climate impact. Prior academic literature, however, suggests that standard green funds may have limited effects on corporate behaviour and emissions. This paper addresses whether investors hold realistic beliefs about such impacts, why beliefs differ between experts and non-experts, and how these beliefs affect investment decisions. Misperceptions matter because they may lead to misallocation of capital intended to address climate change.

Methods

The authors conduct a preregistered survey of 2,101 German retail investors and 182 academic experts specialising in green finance. Both groups evaluate the climate impact of a representative Paris-Aligned Benchmark equity ETF. Beliefs are elicited through agreement ratings, rankings against other climate actions, and quantitative estimates of emissions reductions from a €10,000 investment over ten years. Retail investors’ willingness to pay for the green fund is measured using an incentive-compatible mechanism. A random subset of retail investors receives information summarising expert views, allowing the authors to test belief updating and behavioural responses.

Results

The study documents three main findings. First, retail investors are markedly more optimistic than academic experts about the climate impact of green funds. While 61.5% of experts disagree that a €10,000 investment makes a meaningful contribution to reducing global greenhouse gas emissions, 76.3% of retail investors agree. Experts rank green fund investment as the least effective personal climate action, whereas retail investors place it above actions such as voting or donating. The median expert estimate is that such an investment offsets 2% of an average person’s carbon footprint, with 0% the most common response. Retail investors’ median estimate is 10%.

Second, impact beliefs materially affect investment decisions. Retail investors who believe more strongly in climate impact show higher willingness to pay for the green fund. When informed about expert views, investors revise beliefs downward: average agreement with climate impact falls from positive to negative, the share preferring the green fund declines from 61.8% to 55.5%, and average willingness to pay drops from 61 to 47 basis points. The effect is strongest among investors with initially optimistic beliefs and high climate concern, though most investors still prefer the green fund after treatment.

Third, belief differences stem from divergent mental models. Experts focus on investor-impact channels, emphasising financial-market transmission mechanisms such as changes in asset prices, cost of capital, and firm behaviour, and often judge these effects to be weak or uncertain. Retail investors focus primarily on company-impact narratives, assuming that investing in green firms directly supports emissions reductions. Qualitative responses show limited consideration of market equilibrium effects among retail investors. Experts identify shareholder engagement and direct capital provision to constrained green firms as more promising impact channels than passive portfolio tilts.

Conclusion

The paper concludes that retail investors’ beliefs about green investing are systematically more optimistic than those of academic experts, and that these beliefs shape demand for green financial products. Information provision can correct misperceptions and reduce overpayment for perceived impact. The findings imply a risk of mis-selling and inefficient capital allocation if product impacts are overstated. Improving transparency and communicating credible evidence on how and when investments affect real-world outcomes are therefore important for aligning investor intentions with actual climate impact.