Climate Information in Retail Investors’ Decision-Making: Evidence From a Choice Experiment

Abstract

Financial markets play a decisive role in the transition to a low-carbon economy. This study investigates the role of climate information presentation for climate-friendly investing among retail investors. We conduct a choice experiment in which we vary the presentation format of climate information by means of three label designs to test their influence on investment practices. We provide empirical evidence for the effectiveness of climate labeling as a potential nudge for climate-friendly investing. Furthermore, we find heterogeneity in the influence of climate information across different label designs and cognitive characteristics of investors. Intuitive (reflective) decision makers tend to place significantly more (less) weight on funds’ climate performance compared with financial performance—irrespective of a participant’s environmental preference.

Investment Barriers and Labeling Schemes for Socially Responsible Investments

“…This is a common procedure in order to ensure a basic understanding of the decision problem and is applied in several fields of economic research, such as financial economics (e.g. Bassen et al 2019;Gamel et al 2017;Lee and Veld-Merkoulova 2016), transportation economics (e.g. Ziegler 2012), or energy economics (e.g.…”

“…Kalkbrenner et al 2017). For example, Bassen et al (2019), who aim to analyze the impact of climate information on individual investors' decisions, only include respondents that were invested in stocks, funds, pension plans, or other retirement funds. In the context of investments in renewable energies, Gamel et al (2017) required experience in financial investments, such as stocks, open equity funds, or bonds.…”

“…This is a typical procedure in SC experiments or conjoint analyses (e.g. Bassen et al 2019;Hartzmark and Sussman 2019;Nakai et al 2018;Wilcox 2003), which often comprise hypothetical scenarios, alternatives, or attributes. However, we included some typical techniques in order to mitigate potential hypothetical bias, as described below.…”

“…There has been growing interest in the recent years to establish transparency guidelines, transparency labels, or sustainability labels to facilitate private investors' search for and the transparency of socially responsible equity (or generally mutual) funds. In Europe, the existence of transparency labels by Eurosif, the Austrian Ecolabel, the French Novethic SRI Label, the French Novethic Exceptions are the studies by Bassen et al (2019), Døskeland and Pedersen (2016), , and Hartzmark and Sussman (2019). 6 However, none of these studies analyze whether labeling schemes help to overcome barriers, particularly for investors who have no socially responsible investments yet, but might want to invest in a socially responsible manner in the future.…”

When Investors Call for Climate Responsibility, How Do Mutual Funds Respond?

“…Our paper contributes to the literature on (1) investor preferences and (2) financial intermediaries, in particular mutual funds. As for (1), we complement the literature that studies whether and why investors prefer socially responsible funds and investment products (e.g., Barber, Morse, and Yasuda, 2018, Bassen, Gödker, Lüdeke-Freund, and Oll, 2018, Bauer, Ruof, and Smeets, 2018, Bollen, 2007, Renneboog, Ter Horst, and Zhang, 2011, Riedl and Smeets, 2017). 2 Differently from most previous works, we provide causal evidence of 2 A broader stream of research studies the preferences of investors for socially and environmentally responsible firms, primarily through the lens of stock prices (e.g., Hong and Kacperczyk, 2009, Hong and Kostovetsky, 2012, Krüger, 2015, Lins, Servaes, and Tamayo, 2017 or the portfolio holdings of institutional investors (e.g, Dyck, Lins, Roth, andWagner, 2019, Fernando, Sharfman, andUysal, 2017, Gibson and the effects of investor preferences for a specific salient dimension of sustainability, namely, climate responsibility.…”