Introduction

This study explores the influence of beliefs on investor preferences for sustainable investments, specifically regarding Environmental, Social, and Governance (ESG) ratings and their perceived impact on financial returns. Addressing a gap in understanding how investors weigh sustainability against financial performance in Socially Responsible Investments (SRIs), the study compares investor expectations using three belief-elicitation methods.

Study design

Conducted among Dutch index fund investors, the study applied both incentivised (Exchangeability and Choice Matching Methods) and unincentivised (Likert scale) methods to assess return expectations for high-ESG-rated funds. The incentivised methods aimed to reduce biases seen in traditional survey methods. Participants were randomly assigned to either be informed or uninformed of the ESG rating and asked to estimate returns based on historical performance data. To encourage authentic responses, participants received monetary rewards, including an €400 investment credit for allocation between an ESG fund and a conventional fund.

Belief elicitation

Three methods were used:

• Exchangeability method – This incentivised approach produced a median return expectation by disclosing ESG ratings. In this condition, informed participants reported a 3.3% higher expected return for ESG funds over one year.
• Choice matching method – A partially incentivised approach, this method aimed to mimic investor allocation decisions. When both prediction and matching incentives were introduced, 44.1% of participants expected ESG funds to outperform non-ESG funds.
• Likert scale (Unincentivised) – A commonly used but less reliable method, which showed only 32.4% of respondents expecting ESG funds to outperform. Participants often underestimated returns for ESG funds, potentially due to biases or image concerns.

Results

The incentivised methods indicated that ESG ratings positively influenced median return expectations, raising them by 3.3% for those aware of the ESG status. Unincentivised Likert scale responses showed divergence, with only 32.4% of respondents expecting ESG funds to outperform conventional ones, compared to 44.1% in the incentivised methods. This discrepancy highlights potential biases in unincentivised methods.

Allocation decisions were closely correlated with incentivised beliefs about ESG fund performance, underscoring the accuracy of incentivised methods over unincentivised ones. Demographic analysis revealed that younger, employed, and less-educated investors with smaller investment amounts tended to have higher expectations of ESG funds’ performance. Additionally, participants who perceived low-ESG funds as higher-risk reported an expectation of 15.9% returns for high-ESG funds, compared to 5.5% for those who saw no risk difference. This correlation between risk perception and expected returns highlights the impact of investor beliefs on allocation decisions.

Conclusion

The study concludes that incentivised methods are more effective at capturing genuine investor beliefs about ESG funds, revealing biases in unincentivised approaches like the Likert scale. It recommends that investment firms use incentivised methods to more accurately gauge investor expectations, which can help shape effective ESG investment strategies. Unincentivised methods may lead to a systematic understatement of return expectations, potentially influenced by image concerns, and should be interpreted cautiously when assessing sustainability preferences.