Different Motivations Behind Green and Ethical Investments Implications for Policy-making and Regulation (Part I)

The research on behavioural economics has brought out insights into the actual motivations of individuals. Some of these are not in tune with the concepts of rationality and self-interest within the framework of conventional microeconomics.

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Sections of individuals, households, private firms, corporates, along with different kinds of altruistic organizations have started investing a part of their money to create a social impact or for sustainable development.1 One account shows that the market for green bonds has reached a global total of $521 billion2 The conventional view is that investors seek maximization of their financial gains from their investment, and this is presumed in certain write-ups as dealing with green or social investments too (Noh, 2018). However, such a presumption need not be true as evident from the insights of behavioural economics.3 There can be different motivations – both rational according to the framework of conventional microeconomics, and others noted by behavioural economics, behind green/​ethical investments. In certain cases, the return from a green’ product or investment could be higher than that from a normal one and this could be the motivation. There are other cases where investors derive non-pecuniary rewards from their investments. Even among those who derive such non-pecuniary rewards, there could be multiple objectives. Intrinsic motivation could be a driving force for some of them, and then, there can be issues of incompatibility between such a motivation and financial or extrinsic incentives. There are philanthropic foundations which may be interested in getting a normal’ or average’ return on their endowments or assets even when their ultimate goal is to use their annual gains for socially useful projects. Hence, the specific concern or motivation of the investor may differ, and this can have implications for policies and regulations.

The research on behavioural economics has brought out insights into the actual motivations of individuals (Guth et al, 1982; Kahneman et al, 1986 and others). Some of these are not in tune with the concepts of rationality and self-interest within the framework of conventional microeconomics. A number of papers have dealt with the issues of behavioural aspects in finance.4 The use of emotions and intuitions in investing (Rubaltelli et al, 2010) and herding behaviour are also discussed. There have been efforts to integrate the sustainability consideration into the financial policy framework (Cullen, 2018) and the behavioural economics approach is used to develop a taxonomy to define what can be called an environmentally sustainable activity’ (Beerbaum and Pauschunder 2018). Weber and Johnson (2012) have used behavioural economics for the design of a green growth strategy. The use of behavioural economics in the design of energy and climate policy is also discussed (Pollitt and Shaorshadze, 2011). Bergset (2015) deals with the relationship between green start-ups and investors and touches upon a few aspects of behavioural finance in that context. The insights of behavioural economics are used for nudging people to make green choices5 but these do not deal adequately with all types of motivations for green or ethical investments.

We have not seen many papers which list down all kinds of motivations behind green or ethical investments.6 This paper is a modest preliminary contribution in that direction. It identifies a number of motivations, including both economic and others, discussed in behavioural economics behind the green and social impact investments and indicates the challenges these pose for policy-making and regulation. It also deals with the specific issue of philanthropic foundations which has not attracted adequate attention from academic researchers. The paper is based on a review of relevant literature in behavioural economics and other relevant areas.

When green or ethical investments are profitable

There can be cases where a green or ethical product (including an investment product) is profitable in the sense that it can give a return higher than or equal to the normal market return. Hence, some people might be interested in making investments in such a product even without any specific green or ethical consideration. In order to make this point clearer and think about its implications, let us consider a specific green’ product (and not a direct financial investment). This is the market for organic farm products. Sections of people may be willing to pay a higher price for organic products (than that of normal farm products) due to, (a) perceived benefits to themselves from chemical-free food (which is based on a consideration of private health); and/​or (b) the benefits of chemical free-farming to the environment and society in general.7 When there is such a willingness to pay more, there could be certain situations where the providers of organic products may get a higher revenue than (or comparable to) that received by those who supply regular (not-organic) farm products. It may be noted that the cost of supply of organic products could be higher (and that may be true for many green or ethical products too), but still, the revenue for suppliers of such products could be higher than that of those who supply regular products. Under such a condition, certain suppliers would have an incentive to cater to the organic product market, even when these suppliers are not driven by any green considerations.

Such a situation may prevail in the case of green or ethical investments too. For some reasons (we may discuss some of these in the following sections), the return from such an investment could be higher than that of normal financial investments. Or there could be a premium from green or ethical investments. A commentary8 notes that a low-carbon transition and declining cost curve for renewables may imply a sweeping reallocation of resources and technological revolution, with all the opportunities that may bring’ and these may encourage diversification towards green investments. What is implied here and in such propositions is a situation where green investments become profitable compared to the regular ones. Then a profit-oriented actor without any green or ethical motives would be interested in green or ethical investments too. To a great extent, this is reflected in the current situation wherein green or ethical products are transacted in niche markets.

However, intense competition and an increase in the supply of such green or ethical products (such as organic farm products) might reduce the premium associated with them. Then, the investment for green or ethical products may continue if the expected return from normal products becomes lesser, and that is discussed in the following section.

Considerations to minimize losses in future

People may be interested in investing in green and ethical products when they see potential long-term losses in regular products. This is relevant in the case of investments in the shares of companies. There could be different considerations here, and some of these are discussed in literature.9 The perception that regular products (which are not-so-green or not-so-ethical) could come under stricter regulatory control in future could be one. The expectation of policy changes could be another factor. There could be policy changes that may make investors liable for the social costs imposed by the firms. The expected changes in the behaviour of different social actors can also be a determinant in this regard. If the investors fear that the not-so-green or not-so-ethical products may become less attractive in future due to the changing preferences of consumers,10 then that would be an incentive for shifting investments towards green or ethical products. In this case, too, the investors themselves need not necessarily have green or ethical motivations and the conventional self-interest of individuals is adequate to facilitate this transition. Hence, the tightening of policies and regulations against pollution (or environmental damages) may spur a higher level of investments in greener projects. A similar transition can happen in the case of ethical projects (like, say, those which do not use child labour).

It may be noted that green or ethical products could be costly (and that is the reason for the non or limited supply of such products), but a general transition towards such products may not reduce the return of suppliers (and investors). (They may not get a higher return from such a general transition). Under such a situation, the consumers, in general, would be willing to accept the higher cost of green or ethical products. This could be the equilibrium when green or ethical products would become the normal products and then there may not be any specific considerations necessary for green or ethical investments (as almost all investments would be of that type).

Under the two conditions mentioned above, the role of public policy could be to encourage consumers, in general, to move towards green or ethical products (for self-interest or other reasons). This may encourage a set of profit-motive suppliers to provide such products, and they may get a premium initially. Such a premium may disappear as part of the expansion of the supply, but that equilibrium may sustain due to the overall transition of the society towards such products.

Demand for public, environmental and experiential goods

The higher willingness to pay for environmental or public goods (which is in tune with the self-interest assumption of conventional microeconomics) can also encourage people to make investments for this purpose. Environmental goods can be taken as a flow from stock and when people spend money for the building up of this sock, it can become a green investment. Empirical evidence indicates a general positive correlation between income and a willingness to pay for public goods (Bergstrom, 1973) and a major share of environmental goods/​services is public goods (Kotchen, 2012) or can be an outcome of such public goods including the efforts to control pollution or degradation of the natural environment. Though there is a general increase in the willingness to pay for public goods as an outcome of income growth, such a trend may not prevail for all kinds of environmental goods and services, especially those which would reduce material consumption. There is one argument in the literature that people who come out of poverty or material deprivation may be looking for more material comforts for some more time and they may not necessarily demand experiential goods and services.11 This may dampen the growth of the demand for green goods, especially in developing societies. Similarly, though the Environmental Kuznets Curve (EKC) is valid for several pollutants, it is yet to be noted in the case of carbon dioxide (and hence, climate change).12 This can decelerate the growth of income-induced demand for climate-change mitigating investments all over the world. However, the income growth of individuals has a certain positive impact on the demand for environmental goods and services.

Other factors, such as education, too can play an important role in enhancing the demand for environmental goods and services (Hirsch, 2010; Mobley et al, 2010). All these are compatible with the rationality assumption of conventional microeconomics. Hence, one should expect a certain increase in the readiness to make green investments a part of income growth and educational development in society. This may reflect not only on local environmental goods but also global ones. In that sense, policies that facilitate income growth among a higher share of the population (or an inclusive economic development), may lead to a situation where many more people would be willing to make greener investments.

The impact of this phenomenon on social or ethical investments could be somewhat ambiguous. The reduction of poverty or child labour can be seen as public goods’ (since there is some social benefit from these actions, which are non-rival and non-excludable), and hence, there could be a higher willingness for the provision of such public goods as part of income growth (and change in other factors like education or awareness). This can be a driving force for ethical investments or those aimed at social justice. Theoretically, there are negative impacts on economic growth due to higher levels of inequality (and people may like to reduce it13) but these may not be felt by individuals easily and hence, it may not enhance their readiness to address inequalities in society.

The provision of public goods (including a cleaner environment) requires coordinated action, in other words, there is a need to address collective action problems. This too may indicate the need for a substantial section of society to feel/​perceive the need for such goods. Connecting this with the possible increase in the willingness to pay for such goods as part of income growth would mean that a notable share of the population should witness such income growth and educational development. This too indicates the need for strategies for inclusive economic development in order to facilitate green investments in a notable manner.

Concern about future generations

People may try, according to conventional microeconomics, to maximize the utility of their household as a whole rather than that of the individual. Similarly, people may consider the welfare of their future generations as part of their utility.14 There could be implications for green and ethical investments when the welfare of future generations is also taken into account in deciding one’s own choices.

Those who consider the welfare of future generations and can allocate resources for that purpose (which may depend on the trade-offs between the consumption of current and future generations and the wealth of the former) may invest more in green investments if these are found to be important for their future generations. However, it seems that this pattern may not be that relevant for investments which enhance social justice or reduce inequality. A majority of those who are concerned about the socio-economic position of their future generations may come from less affluent groups and they may not have adequate wealth to make significant investments for a general improvement in social justice (or reduction in inequality) since whatever limited resources they have may be used for enhancing the socio-economic situation of their own future generations. A major part of the wealth of such families would be used for enhancing the capabilities of their children with some remaining for bequests.15

In societies where educational and occupational choices of future generations do not depend mainly on the wealth of parents16 (through the availability of institutional capital for education or enterprise-building), affluent parents may not devote all their resources to ensure the well-being of their future generations. That may enable them to make investments for the welfare of future generations in general (not just their own).17 This may facilitate green and social impact investments, which may include contributions to the endowments of universities (higher education) or research and/​or funding social impact investments. One policy implication could be that the availability of enhanced public support for higher education and enterprise building may encourage the current generation to divert a part of their wealth for social-impact or green investments.

Social value orientation

It could be that the utility of people depends not only on their own welfare but also on that of others. This is called social value orientation’ in the literature (Murphy et al, 2011). Batson et al. (1988) define empathy as an other-oriented emotional response congruent with the perceived welfare of another person [which] can evoke motivation to help that person’ (p. 52). Cialdini et al (1981) highlighted the negative state relief hypothesis. These researchers believe that the helping behaviour is motivated by the egoistic motive of a person’s need or desire to relieve personal distress (such as sadness, anxiety), elicited by observing another’s suffering. There are philanthropic individuals who want to devote their resources to reducing poverty or improving the education or healthcare of others in society.18 The distance to the other (in a metaphorical sense) may matter here. Longer distance may reduce the emotional connect and increase the cost of monitoring the benefit of spending, and both these together may create a situation where the actual spending could be higher on those who are closer.

Social value orientation may enhance social impact investments which can reduce the ill-fare of the less privileged. In this case, the potential increase in the welfare of targeted others is the return that the investors expect. Whether it is about caring for one’s own future generations or about the others, it may depend on individual differences on perceived closeness with others. There can be differences in the perceived closeness of the current self with the future self (Bartels and Rips, 2010) or with others. Hence, there can be public/​social interventions that can change these perceptions of closeness or distance so as to facilitate more green or social-impact investments.

There could be a higher level of uncertainties in the return (this could be enhanced utility by considering others’ welfare) from a specific social impact investment, even if the average return from such investments is higher. This is due to several factors which affect the improvement of the welfare of others even if money is spent, and most of these factors are beyond the control of those who spend it.19 This uncertainty may discourage people from making adequate investments for this purpose. From a public policy perspective, the reduction in uncertainty in this regard through innovation (such as the use of technology and other means) may encourage more investments. The practices that would improve the effectiveness of actions (or reduce information asymmetry in this regard) which are funded by individual donors and philanthropic organizations may facilitate higher investments of this kind.

Non-monetary extrinsic incentives 

People may look for non-monetary rewards from society (Ryan and Doci, 2000). These may include social recognitions (such as awards, media exposure) of different kinds. Conspicuous consumption for social status (Bourdieu, 1984) is also part of this phenomenon. However, the need for distinction or social status can be used for encouraging green or ethical investments too (Griskevicius and Tybur, 2010). There can be different kinds of awards and media exposure for those who make such investments. However, the value of such recognition may decline as it becomes less and less distinct. This may happen when such investments become more common (due to all kinds of motivation described in this article). There is a general perception of the inferiority of extrinsic motivation and the superiority of intrinsic one (Ryan and Doci, 2000), and the latter is considered in the next section (in Part II of this article).


V Santhakumar is Professor, Azim Premji University, Bangalore.

Featured image by Markus Spiske on Unsplash

  1. For a description of such investments, see Perez (2007)↩︎

  2. https://www.weforum.org/agenda/2019/09/these-countries-are-leading-the-way-in-green-finance/↩︎

  3. For a recent review, see World Development Report (2015)↩︎

  4. For reviews, see Shiller (2003); Frankfurter and McGoun (2002) and Subrahmanyam (2008)↩︎

  5. For a review, see Schubert (2017)↩︎

  6. There are general articles touching upon some of these aspects. For example, the blogs in https://www.trucost.com/trucost-blog/esg-meets-behavioral-finance-part-1/↩︎

  7. For a discussion of organic farming see, http://www.fao.org/organicag/oa-faq/oa-faq5/en/; or articles such as Rodiger and Hamm (2015)↩︎

  8. https://www.climatechangenews.com/2015/12/07/in-paris-polluters-in-focus-as-investors-spurn-climate-risk/↩︎

  9. Some of these are mentioned in Cohen and Santhakumar (2007)↩︎

  10. There could be trends such as the one noted in https://www.nielsen.com/eu/en/insights/article/2018/global-consumers-seek-companies-that-care-about-environmental-issues/↩︎

  11. Experiencing economic hardship, war or social and political upheavals leads to the development of materialist values (Inglehart, 1977)↩︎

  12. For a review, see Dinda (2004)↩︎

  13. This is evident from the numerous articles on inequality aversion, which are based on the in-built notion of fairness and which we discuss in a section below.↩︎

  14. One key concern in economics is whether the welfare of future generations should be discounted or not. See, Arrow (1999).↩︎

  15. Bequests may not be the main form of transfer of parental wealth to children even in the developed world. See, Pfeffer and Killewald (2018).↩︎

  16. Though welfare states may be able to decouple the parental welfare and the educational/occupational choices of children, the insurance function of the parental wealth may remain. See, Pfeffer and Hallsten (2012).↩︎

  17. In fact, wealthy parents in such societies may not be interested in transferring all their wealth to their heirs. See. Schervish (2008).↩︎

  18. Giving is explained by the `identification of the self with the needs and aspirations of others’. Schervish et al (1998).↩︎

  19. There are challenges in ensuring that altruistic actions are effective: Three articles of this author discuss some of these issues: Philanthropic Foundations and the Government: Challenges in the Relationship ; Philanthropic Foundations and NGOs: Challenges in the Relationship and Challenges in Managing Employees of an Altruistic Organisation↩︎