Impact Preferences in Sustainable Investing: Theory and Experiment

Résumé

Sustainable investing is widespread, yet investors' motives are not well understood. Are they driven by a desire to generate environmental impact (impact preferences) or by a preference to invest in firms that share their values (value alignment)? To distinguish these motives, I conduct an experiment with U.S. investors, eliciting their willingness to pay for investments in firms that vary only in environmental impact. The experimental design varies (i) participants' pivotality in changing the firm’s externalities and (ii) the firm’s current level of externalities. These variations allow me to distinguish impact preferences from value alignment, and to examine whether participants value a firm’s current level of externalities independently of the investment impact. My main finding is that for investments that generate the same positive impact, participants prefer those that help firms transition from negative to positive externalities. Structural estimates indicate that this behavioral pattern is driven by two forces: an asymmetry in how participants value positive versus negative externalities, and diminishing sensitivity to externality size. Contrary to previous evidence, participants are motivated primarily by impact preferences rather than value alignment.