How to Elicit Preferences for Sustainable Investments?
Recently, the EU delivered an action plan on financing sustainable growth in which “Sustainable Finance” is a key policy pillar. Several of the actions are directly related to the duties of institutional investors. Institutional investors need to integrate the preferences of their participants for sustainable investments into contractual arrangements. The action plan further explicitly demands policies on incorporating sustainability in investment advice. How can institutional investors, such as pension providers, identify their clients’ preferences for sustainable investments? This is challenging for two reasons. First, an elicitation method has to overcome demand or social desirability effects. Second, preferences for sustainable investments depend on how much it impacts financial returns in expectation.
In our project, we will develop and validate scientific methods to elicit preferences and beliefs for sustainable investments and apply them to different financial institutions in various European countries. We will measure and analyze investors’ preferences and beliefs in a passive as well as active choice environment by investigating delegated investments and direct individual investments. Further, we will explore the role of personal experiences and biased memory of those in both contexts. Finally, we will validate our results across types of institutional setups and countries. Our project will have academic, practical, and policy contributions by providing empirical evidence for when and why investors’ sustainability preferences and beliefs impact investment behavior. Moreover, we will develop a valid elicitation method of sustainability preferences, which can inform future research, pension practitioners, and policy makers.