Is Sustainable Investing Driven by Social Preferences? Evidence from Shocks to Philanthropy

We show that social preferences do not drive sustainable investing (SI) by examining the response of SI flows to exogenous shocks that activate pro-social motives. Our design capitalizes on the inherently social nature of philanthropy to identify which shocks genuinely activate social preferences and then tests whether these same shocks also affect SI flows. A set of environmental shocks trigger social preferences, as evidenced by a significant effect on granular US charity flows, but do not elicit a response in SI. A negative shock to the tax shield benefits of philanthropy results in outflows in charitable donations but these are not redirected towards SI as might be anticipated if both avenues serve to fulfil social preferences. Our tests are very strict in the sense that we define treated and control charities and SI funds based on their detailed classification and style. We offer additional supporting evidence by performing event studies on SI fund net asset values. Furthermore, we address several alternative explanations, including considerations of reputation, risk-return effects, and institutional and informational differences between SI and philanthropy. Whilst we do not observe a market-wide effect, our analysis based in the US Federal Reserve Survey of Consumer Finance reveals transfers between philanthropy and SI among Millennials. The absence of a market-wide effect may be attributed to the relatively small proportion of capital flows generated by the demographic group most interested in SI. We show that our findings also hold in the UK. Policy makers considering higher ESG mandates should recognize that appealing to social preferences may be less effective than risk/return-based incentives in redirecting investment flows.