Abstract:-
Trillions of dollars are invested in socially responsible businesses. However, the true underlying mechanism for investors’ socially responsible investment is yet unknown. In this paper, we investigate beliefs towards an ESG (environmental, social, governance) fund in an incentivized lab experiment. Subjects in our experiment were given exactly the same information about a fund with or without knowing that the fund has a high ESG rating between treatments, and we designed methods to formally evaluate their beliefs about the fund’s return and risk for both short-run (1 year) and long-run (3 years), updating of belief in the face of positive and negative return information, and perception of the level of ambiguity. We find that knowing the high ESG rating increased subjects’ return expectation, which is the opposite of what has been found in widely used unincentivized survey studies. Moreover, the high ESG rating made subjects more conservative when updating on negative information, and perceive lower ambiguity. This suggests that the unincentivized elicitation of ESG-related beliefs could be systematically biased. Our results contribute to the understanding of why investors hold high ESG investments and to the design of relevant policies   (Joint with Rob Bauer and Bin Dong)