Why Do Investors Hold Socially Responsible Mutual Funds?
Socially responsible investments (SRI) are ever-increasing in importance. But why do investors buy these assets? There are three potential motives: (1) they could be triggered by financial motives, (2) they could be interested in creating a positive social image of themselves, or (3) investors could have strong pro-social preferences.
The authors analyze a unique data set consisting of administrative data linked to survey responses and an incentivized experiment. The experiment is a standard tool in economics to elicit intrinsic social preferences and uses real money to incentivize participants who know that they will remain anonymous. The importance investors place on their social image was measured by asking them how often they talk about their investments. Only when they talk about their investments are others able to observe that one invests socially responsibly. The financial motives could be assessed by looking at the actual performance of participants using the administrative data.
This unique composition of different data sources allows the authors to see whether experimentally elicited prosocial behavior of investors can explain their real-life investment behavior. The authors find that social preferences as well as social signaling are indeed an important determinant of socially responsible investment decisions. Financial motives on the other side appear to be of limited importance. Even further, investors are actually willing to forgo financial performance to invest in accordance with their social preferences.
16.2% of the investors in the sample can be classified as socially responsible investors, because they hold at least one SRI equity fund. These investors, on average, hold 4,574 euro in SRI equity funds, which corresponds to 23.0% of their total equity investments.
- Social preferences are key: A prosocial investor is 14 percentage points more likely to hold an SRI equity fund than a selfish investor. This effect size is economically substantial as only 16% of our total sample hold an SRI equity fund.
- The social image matters: Social signaling is a motive for investors to hold SRI equity funds. Investors who talk more often about their investments are also more likely to invest in a socially responsible way.
- Donations complement SRI: Socially responsible investors donate about 41% more to charity than conventional investors. An important implication from this is that SRI does not decrease charitable giving. On the contrary, those who are already willing to give also like to invest in SRI.
- Financial reasons matter only for some: In order to invest in concordance with their social preferences, some investors are willing to forgo financial performance. At the margin, however, pessimistic performance expectations reduce the likelihood to invest in a socially responsible way.
Not only are investments in socially responsible assets vastly growing. This paper shows that this interest stems to a significant extent from investors trying to align their investments with their social preferences. In other words, these investors really want to invest in SRI because of its social impact.
These findings have a big relevance for asset managers and in particular for pension funds. Being able to offer contributors the possibility to invest in socially responsible assets may allow current contributors to invest more in line with their social preferences. On top of this, it can prompt investors to start investing with a particular fund where they can nurture their investment needs, something they were not able to do elsewhere.