Social Preferences of Investors and Sustainable Investing

Abstract

I study portfolio sustainability and capital flow dynamics in socially responsible and conventional mutual funds. I document that a large fraction of conventional funds systematically invests sustainably even without a social mandate, while several socially responsible funds persistently green-wash. Both conventional and socially responsible investors value sustainability as they reward sustainable fund portfolios, but they do not punish weak social performance to the same extent that they reward strong social performance. Socially responsible investors respond to portfolio sustainability only when the fund performs poorly financially. As a result, much green-washing goes unpunished. Further, sustainable portfolios do not financially outperform conventional portfolios, suggesting that investors value sustainability for non-economic reasons.