Firms are investing significant resources towards sustainable goals that do not necessarily seem to be just about maximizing profits. Is this a good thing? It depends on what their investors want. If their investors want them to be making green investments, then the answer should probably be “yes”, but what do their investors actually want? The problem is that investors have a myriad of different preferences. Consider people you know—you certainly know people who think it is great that firms are making green investments, others who think it is wasteful and absurd for them to be doing so, and even others who do not understand why it is even worth discussing the issue. So, if all of these people are in the market, to which one should firms be looking when they decide to make their investments? Which investor is the average investor? How does the market view sustainability overall?

In most settings this is a really hard question to answer, but our paper ‘Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows’ examines a novel natural experiment to get around the typical issues and finds that overall, investors value sustainability. The paper examines an experiment that impacted the salience of sustainability for the entire US mutual fund industry. The sustainability of most mutual funds went from being difficult to know, to being prominently displayed on a simple one to five scale based on ratings created by Morningstar. Importantly, these ratings simply took previously available public information and transformed it into an easy to understand rating where funds were low, high, or variants of average in terms of their sustainability. There was no new fundamental information, simply a change in the salience of how sustainable a mutual fund’s holdings were.

Mutual funds rated high in sustainability received significantly more money and grew by about 5 percent per year and funds rated low in sustainability shrank by about 5 percent per year. Overall, more than 24 billion dollars flowed into high sustainability funds, while those rated low lost more than 12 billion dollars. Investors paid attention to the simple one to five scale, and focused on being one or five, with minimal attention paid to the other categories.

So, if investors seem to like sustainability, what is it that drives the demand? One possibility is that the results are reflecting institutional investors who invest in sustainability not for performance, but because they are mandated to do so by their institution. We find that institutional share classes for mutual funds experienced similar flows to other share classes, which means it cannot just be institutions driving the effect. Maybe the flows had nothing to do about the environment, but high sustainability funds just perform better and make higher returns. While the dataset covers a short time period, there is not any evidence that high sustainability funds achieved high returns, and if anything there is weak evidence that high sustainability funds underperformed low sustainability funds.

To try and further understand what could be driving the mutual fund flows observed in the data, our paper reports an experiment with MBA students and Amazon Mturk participants. We find that people thought that high sustainability funds would achieve high returns and be less risky too. This is consistent with the affect heuristic, perceiving expected investment performance to be more favorable because of the positive emotion associated with sustainability generally. While this is not a rational way to form expectations of performance, the findings suggest that a portion of the flows can be explained with this behavioral bias.

But what about people who invest for non-pecuniary reasons like making the world a better place. Do they matter? Indeed, they do. We find that, after controlling for investor’s expectations of risks and returns, subjects allocated more money to high sustainability funds. This suggests that at least some individuals are taking these non-pecuniary motives into account and investing for more charitable goals.

Abigail Sussman is an Associate Professor of Marketing at the University of Chicago Booth School of Business.

Samuel M Hartzmark is an Associate Professor of Finance at the University of Chicago Booth School of Business.