9197 2021 July 2021 Do Retail Investors Value Environmental Impact? A Lab-in-the-Field Experiment with Crowdfunders Christoph Siemroth, Lars Hornuf Impressum: CESifo Working Papers ISSN 2364-1428 (electronic version) Publisher and distributor: Munich Society for the Promotion of Economic Research - CESifo GmbH The international platform of Ludwigs-Maximilians University’s Center for Economic Studies and the ifo Institute Poschingerstr. 5, 81679 Munich, Germany Telephone +49 (0)89 2180-2740, Telefax +49 (0)89 2180-17845, email [email protected] Editor: Clemens Fuest https://www.cesifo.org/en/wp An electronic version of the paper may be downloaded · from the SSRN website: www.SSRN.com · from the RePEc website: www.RePEc.org · from the CESifo website: https://www.cesifo.org/en/wp CESifo Working Paper No. 9197 Do Retail Investors Value Environmental Impact? A Lab-in-the-Field Experiment with Crowdfunders Abstract Are investors willing to give up a higher return if the investment generates positive environmental impact? We investigate this question with a decision experiment among crowdfunders, where they choose between a higher return or environmental impact. Overall, 65% of investors choose environmental impact at the expense of a higher return for sufficiently large impact, 14% choose impact independent of the magnitude of impact, while 21% choose the higher return independent of impact. Combining the experimental data with historical investments, we find that investors allocate a larger share of funds to green projects if they value environmental impact more, and if they expect green projects to be more profitable. These findings suggest that investors have a preference for positive environmental impact, and satisfy it by investing in green projects. We further show that the preference for environmental impact is distinct from a preference for positive social impact. Finally, we introduce new survey measures of impact for future use, which are experimentally validated and predict field behavior. JEL-Codes: C930, D140, D900, G320. Keywords: debt crowdfunding, environmental impact, ESG, green investments, social impact, sustainable finance. Christoph Siemroth Lars Hornuf University of Essex University of Bremen Department of Economics Faculty of Business Studies and Economics United Kingdom – Colchester, CO4 3SQ Germany – 28359 Bremen [email protected] [email protected] July 14, 2021 We are grateful to Paul Belleflamme, Friederike Mengel, Dennie van Dolder, and Lisa Spantig, as well as seminar participants at Essex and ESCP Berlin for valuable comments. We also thank the representatives of the ROCKETS crowdfunding platforms for their incredible support for this field experiment, in particular Silke Glauninger. This work was supported by the Economic and Social Research Council [grant number ES/T015357/1] and the German Federal Ministry of Education and Research [grant number 031B0781A]. This experiment received ethical approval from the University of Essex, application no. ETH2021-0924. Moreover, we pre-registered the statistical analysis: https://www.socialscienceregistry.org/trials/7597. 1 Introduction Climate change is increasingly seen as a major societal problem. Addressing climate change and reducing greenhouse gas emissions will require substantial changes in the global economy, especially in the energy or transportation sector (e.g., Unger et al., 2010). These changes will require substantial investments in R&D for new technologies, such as renewable energy or low emission transportation, and in infrastructure, to replace or phase out the existing high emission technology. The capital market plays a central role in the financing of these new technologies, products, and services. If the financing is inefficient, or financing constraints prevent better technologies from being developed and socially desirable projects from being implemented, then the goal to limit climate change and reduce greenhouse gas emissions might not be attainable. Indeed, the conditions in capital markets directly determine how costly addressing climate change will be. For these reasons, it is important to understand how investors evaluate investments in \green" projects that have a positive environmental impact, compared to conventional projects that have no or even a negative environmental impact. On the one hand, investments in new green technologies may be more risky or less profitable, as many new technologies and products fail. Thus, risk averse investors might be hesitant to invest in such projects. On the other hand, investors might have a preference for doing something positive for the environment, effectively increasing their utility from investing in a green project, while also expecting a return on investment. Such preferences might make green projects more attractive than conventional projects, keeping all other factors such as expected returns, risk, and liquidity equal. In this paper, we study investors from a group of crowdfunding platforms that offers both green investment projects and conventional investment projects. This allows us to investigate why investors choose green projects over conventional projects. The main question is whether investors invest because they believe green projects are more profitable in expectation, or whether they invest because they also have a preference to achieve a positive environmental impact. Testing the hypothesis that investors value environmental impact is difficult, because measuring the true preferences for impact is not straightforward. One approach is to ask investors directly whether it is important to them to achieve a positive environmental impact. However, given that questions of environmental policies and climate change have been met with increasing polarization in recent years (e.g., Farrell, 2016; Chinn et al., 2020), there is a concern that answers to such survey questions would be biased. In particular, social desirability bias might favor answers that let the investor appear as caring about the environment and wanting to achieve positive environmental impact, even if they do not have such preferences. Because survey answers do not have material consequences, there is little cost to investors in giving the socially desired rather than true answer, which might lead to biased measures. We address the potential problem with self-reporting and the social desirability bias by conduct- ing an online \lab in the field” decision experiment. This allows us to use an incentivized preference elicitation method to find out how much the investors truly value environmental impact when mak- ing investment decisions. Our method|a menu-based Becker-DeGroot-Marschak (BDM) mechanism 2 (Becker et al., 1964)|achieves this by introducing an explicit trade-off. In the decision experiment, investors can either receive a higher expected investment return by choosing a voucher to be used for non-green investment projects. Or, instead, they can give this money to an environmental cause, thus achieving environmental impact, but getting no higher investment return. Consequently, investors cannot merely claim to care about environmental impact without consequence; they would have to give up a higher investment return to do so, which makes our lab measures of the importance of environmental impact more credible. The voucher can later be used by the investors on a real estate project of their choice, but not on green projects, which ensures the clean trade-off between higher investment return or environmental impact, but not both. We asked all investors for their willingness to donate to each of two organizations to capture environmental impact. First, a carbon offsetting firm, which uses the donation to reduce greenhouse gas emissions, for example by substituting fossil fuel energy sources with renewable energy sources. And second, Greenpeace, the most well known and most donated to environmental organization in the country we study. A donation to either of these two organizations implies environmental impact, and by using donations to both organizations our measure of environmental impact is broader than just carbon offsetting. Our BDM procedure allows us to determine|for each investor and each organization|the do- nation amount for which the investor just prefers the donation to the specific organization over the investment voucher for themselves. Hence, the BDM procedure produces a fine measure of the impor- tance of environmental impact. Investors who choose the voucher for themselves, no matter how large the donation amount, reveal themselves as not attaching any importance to environmental impact. Investors who forgo the investment voucher for a smaller donation amount, on the other hand, attach a larger importance to environmental impact. About 21% of investors choose the voucher independent of the donation amount to the environ- mental organizations, and hence reveal they do not value environmental impact. At the other extreme, about 14% of investors are willing to give up the voucher for any donation amount, and hence reveal a very strong preference for environmental impact. The remaining 65% are willing to give up the voucher only for a sufficiently large donation, with a large variation in the indifference point. These numbers suggest that a large portion of investors might be willing to accept slightly lower investment returns from green projects if the environmental impact is sufficiently large. Among the two environmental organizations, carbon offsetting is valued more by investors than a donation to