Do investors care about impact?
Investors care about sustainable investments, but not enough to pay substantially more for more impact. A framed field experiment revealed investors’ preference was an emotional rather than a calculative valuation of impact. This preference is driving the market, as managers provide little quantitative evidence of sustainability impact, according to the report.
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OVERVIEW
Investment information
The experiment involved providing investors with investment options and their associated financial performance and impact information. The report chose CO2 emissions to present the impact information, which it translated into trees planted, kilometres of air travel, and daily emissions of an average EU citizen for better comprehension. Investors were randomly assigned either a high or low impact option. The report found that investors did not show sensitivity to the levels of impact presented but did show sensitivity to when multiple sustainable investments were presented, particularly to the relative impact compared to others.
Willingness-to-pay for social impact
Despite investor demand for sustainable investments growing, the report suggests that little is being done to cater quantitatively for these demands. While there is a severe risk of greenwashing in sustainable finance, financial institutions have little incentive to provide products that substantiate their sustainability claims, especially when the investor’s preference for impact is quite emotional. If investors are willing to pay for investments that provide a warm glow of satisfaction and offers less impact, financial institutions will emphasise optimising investor’s emotions while offering less impact when the allocation of impact incurs added costs.
Willingness-to-pay for social impact with externality pricing
Insensitivity to the levels of impact might be the result of a lack of salience or comprehensibility of the impact information presented. However, pricing-in externalities could be a measure for avoiding scope insensitivity in sustainable investing. The report suggests that investors are insensitive to quantity, even when confronted with well-defined quantity metrics, such as CO2 tonnes saved. The findings suggest that improved sustainability accounting, while desirable, will not help alignment between willingness-to-pay (WTP) and impact. However, the report emphasises that the current situation creates an opportunity to provide quantitatively substantiated product offerings while catering to investor preference for impact with an emotional feeling.
Robustness checks
The report corroborated its findings in several robustness tests, finding that presentation of information or comprehensibility does not affect WTP. Also, WTP for more impact does not scale linearly, and the findings hold with or without past financial performance data. Findings from the MTurk samples and tests revealed that the main experiment’s results were genuine and not artefacts of the analysis. Nonetheless, socio-demographic characteristics did not correlate substantially with WTP or sensitivity to impact levels. The study’s findings suggest that investors are willing to pay more for sustainable investments but are indifferent to the impact levels offered.
Recommendations
The report recommends financial investment firms provide quantitative evidence of the sustainability impact of their products to align WTP with impact sensibility in sustainable investing. Finally, the report suggests that sustainable investments might need to compromise on financial performance, and additional data expertise requirements likely add to product costs and fees.
