Climate change is increasingly seen as a major societal problem. Addressing climate change and reducing greenhouse gas emissions will require substantial changes in the global economy, especially in the energy or transportation sector. These changes will require substantial investments in R&D for new technologies, such as renewable energy or low emission transportation, and in infrastructure, to replace or phase out the existing high emission technology. The capital market plays a central role in the financing of these new technologies, products, and services. If the financing is inefficient, or financing constraints prevent better technologies from being developed and socially desirable projects from being implemented, then the goal to limit climate change and reduce greenhouse gas emissions might not be attainable. Indeed, the conditions in capital markets directly
determine how costly addressing climate change will be. For these reasons, it is important to understand how investors evaluate investments in “green” projects that have a positive environmental impact, compared to conventional projects that have no or even a negative environmental impact. On the one hand, investments in new green technologies may be more risky or less profitable, as many new technologies and products fail. Thus, risk averse
investors might be hesitant to invest in such projects. On the other hand, investors might have a preference for doing something positive for the environment, effectively increasing their utility from investing in a green project, while also expecting a return on investment. Such preferences might make green projects more attractive than conventional projects, keeping all other factors such as expected returns, risk, and liquidity equal.

In their paper, researchers Christoph Siemroth, University of Essex, Department of Economics, and Lars Hornuf, University of Bremen, Faculty of Business Studies and Economics, study investors from a group of crowdfunding platforms that offers both green
investment projects and conventional investment projects. This allows them to investigate why investors choose green projects over conventional projects. The main question is whether investors invest because they believe green projects are more profitable in expectation, or whether they invest because they also have a preference to achieve a positive environmental impact.

They find that the majority of investors is willing to give up a higher return as long as the environmental or social impact is large enough. However, there is large variation among investors in just how much positive impact is needed to give up the higher return. Still, this is convincing evidence that investors have a preference for environmental impact and for social impact. Researchers further find that those with a stronger preference for environmental impact also invest a larger share of their funds in green projects, so the experimental measure explains field behavior. This suggests that investors view green projects as one way to satisfy their preference for environmental impact. Besides environmental impact, return expectations for green projects also play a significant
role in explaining green investments. Perhaps surprisingly, even though many investors also value social impact, those who do did not invest more in green projects, which suggests that it is environmental and not social impact that drives green investments. Overall, these findings can be taken as good news for environmental projects and technologies, as these investor preferences tend to increase demand for such investments. Whether this ultimately results in lower funding costs for green projects in large capital markets will depend on the actions of all investors, including institutional investors.

Overall, 65% of investors choose environmental impact at the expense of a higher return for sufficiently large impact, 14% choose impact independent of the magnitude of impact, while 21% choose the higher return independent of impact. Combining the experimental data with historical investments, researchers find that investors allocate a larger share of funds to green projects if they value environmental impact more, and if they expect green projects to be more profitable. These findings suggest that investors have a preference for positive environmental impact, and satisfy it by investing in green projects.

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