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

There is a well-known trade-off between intrinsic motivation and financial incentives or disincentives. The conventional idea that an intrinsically motivated person can be further encouraged through financial incentives need not work in all circumstances. Financial incentives and intrinsic motivation may not be synergic or move in the same direction in every situation.

Intrinsic motivation

Some sections of people are not motivated only by financial (material) and extrinsic (like recognitions) incentives, but also by an intrinsic motivation (Ryan and Doci, 2000). This motivation may dominate in some individuals. Experimental or quasi-experimental settings and the presence of anonymous giving1 for social and environmental purposes have demonstrated the influence of such intrinsic motivation. Such motivation to do the right’ is somewhat different from the motivation to take action due to concern for others. The former could be somewhat absolute. Helping to mitigate poverty in the world may be seen as the right thing2 to do, and this decision/​action may not be due to the concern about some specific people who are poor. These personal norms (which determine intrinsic motivation) are situated, self-based standards for specific behaviour generated from internalized values during the process of behavioural decision making’ (Schwartz and Howard 1984:234). Internalized values are likely to evoke feelings of moral obligation to either help or not help when an individual is faced with behavioural decisions involving altruism (Piliavin and Charng 1990). There could be funding for general social or environmental purposes from those who are driven by intrinsic motivation.

However, such actions driven by intrinsic motivation may encounter two trade-offs. Giving or using money for a social or environmental purpose may itself be the reward for the contributor as he/​she has done the right thing. Then, there may not be enough motivation to see that the money is used for the intended purpose, since ensuring it requires time and resources on the part of the donor. The lack of connection with the specific users3 or the lack of interest in extrinsic incentives (like recognitions), though could be useful in certain situations, may dampen the incentive to monitor the investments made for this purpose. The difference between intrinsic motivation and the urge for extrinsic rewards is that probably the latter would be achieved only after realizing the outcomes.

Then, there is a well-known trade-off between intrinsic motivation and financial incentives or disincentives. The conventional idea that an intrinsically motivated person can be further encouraged through financial incentives need not work in all circumstances. Financial incentives and intrinsic motivation may not be synergic or move in the same direction in every situation.4 This can be one consideration against the legalization of the markets for blood and organs.

This issue of trade-off between intrinsic motivation and financial incentives can have an implication for green or ethical investments too. If the returns from such investments are comparable with returns from other investments, there could be a decrease in the interest of intrinsically motivated people to make green or ethical investments. The promotion of financial incentives for green or ethical investment may discourage intrinsically motivated people from making such investments. People who are truly motivated intrinsically may not derive much joy from non-monetary extrinsic rewards.

How to encourage people to have an intrinsic motivation to make green or ethical investments is an interesting issue. This may be connected with the moral framework of individuals, and this can, in turn, be based on religious and secular frameworks.5 The number of people who contribute for religious reasons is very high in different parts of the world (though there is a lack of clarity on whether such giving can be attributed fully to their intrinsic motivation). However, a part of this giving is to help other people in society (and thereby, contribute to social impact and justice).6 Do religious considerations help people to accept a lesser reward from their normal financial investments, is another interesting issue. The experience of Islamic banking may be assessed to understand this issue.7 However, there may not be a strong connection between religious giving and green purposes but that can evolve or be fostered.

Sense of fairness

Experiments in behavioural economics, like the ultimatum game (Guth et al, 1982; Kahneman et al, 1986) have shown that people are willing to sacrifice based on their sense of fairness. This is noted when someone is treated unfairly, but such a tendency also encourages others to change their behaviour.8 Another experiment namely the trust game’ brings out the impact of non-economic motives and social norms regarding this sense of fairness (McCabe et al, 2003). This may have a number of implications for investments for social impacts. First, it may encourage people to divide a higher share of surplus between partners in an economic activity (and that can be between the owners of capital and workers) than that can be explained by the bargaining power of each party. The resource-rich partners may be willing to share a higher level of surplus with those who have fewer resources, even if the latter has only limited power in the bargaining. It can also lead the former to make investments for the benefit of the latter (say, the investments by owners to provide social security for workers). Such a willingness to share a part of the surplus need not be only with the workers9 but also with the less-privileged section of society, in general. This could be one of the considerations when superrich individuals spend money for the education or healthcare of the less privileged. This could be the basis of philanthropic investments and endowments created for one or the other social purpose. Probably this phenomenon may not be a serious motivation for green investments. The issue of fairness in the sharing of resources between the current and future generations has not been felt or debated very deeply.

This sense of fairness may operate between actual and potential partners. Who is seen as an actual/​potential partner could be the issue in this context. The owners of capital in a developed country may be willing to invest a higher share of surplus for the social security of their workers in their own country, but such a fairness consideration may not be there for the workers in other parts of the world who may become partners through different kinds of outsourcing arrangements. There could be a higher willingness among the rich people to share resources with fellow citizens requiring better treatment’. The sense of fairness that leads to the sharing of a higher level of surplus with the workers or fellow-citizens may need the evolution of a shared culture, polity, which may require social transformations that bridge the traditional distance between the rich/​owners of capital and the poor/​workers. It is the same process through which the social contract10 in certain countries enables a higher level of taxation and the use of these resources for the provision of public goods (and private goods, such as education, healthcare and the like) to enhance the welfare of all. Using this idea of fairness to create more social-impact investments may require the generation of a sense of closeness with the other. There can be informational campaigns to develop that sense of closeness with others’ and these may attempt to include those who are not accounted for, like the children who work in the factories in other countries or future generations who may face deprivation due to environmental degradation.

Loss aversion

Behavioural economics has demonstrated that people may value loss and gains (from a given point of endowment) differently. The disutility associated with the loss could be higher than the utility related to the gain. This may have some implications for green or ethical investments if these results in financial losses (Weber and Johnson, 2012). There could be a role for reframing upfront costs not as losses but as foregone gains (Podesta et al, 2008). It could be that people may not be willing to divert their accumulated endowments for green or ethical investments. On the other hand, there could be a higher willingness to allocate their potential future gains into portfolios which may include green or ethical options. This is only a hypothesis and needs to be verified. However, such a situation may change when the return from other investments declines. The tightening of environmental regulations and the consequent signalling of the potential losses from environmentally harmful investments could facilitate such a change (but this may spur green investments due to the motivation to minimize the losses, an issue discussed earlier).

Instinctual decisions, herd behaviour, and mental models of reality

Studies in psychology, neurosciences and other related disciplines11 note that the decisions made by human beings need not be based on deliberations (and could be based on instincts), there could be a herd behaviour in this regard, and people have a mental model of reality, and that model need not necessarily corresponds to reality. Even when new information is available, people may internalize it based on or in tune with their mental model of reality (Baron, 2000). Knowledge gained from new information could be different from one person to another, depending on education and personal experience (Bonnet and Wirtz, 2011). These too may have implications for social and green investments. A notable share of investments may not be on the basis of individuals’ cost-benefit calculations. Many people may wait for others to plunge in even though they have the resources to invest for green and social purposes. The creation of a habit or acceptance among sections of people may become important. This may highlight the importance of popularizing the need for such investments by governmental and multi-lateral agencies. There can be lead investors’ or pioneers and the dissemination of their experience may matter. There may be a need for role models or ambassadors.12 Making such investments attractive financially during the initial period through subsidies could be another option in this context.13

Cognitive myopia

There can be, what is called, cognitive myopia (Benartzi and Thaler, 1995; Read et al, 1999) which may encourage people to neglect gains in the longer term and focus more on recent losses. This is related to the use of inappropriate discount rates (Weber et al, 2007). This habit may work against green or social-impact investments whose returns are derived in the long term. This may require a combination of such investments which yield returns in both medium- and long-term. Those who are exposed to medium-term returns may gradually accept those opportunities which yield longer-term returns. The provision of information or feedback on how one’s investments contribute to green or social goals intermittently may also help in overcoming this constraint to some extent.

Implications of inertia

It has been noted that inertia in people may stop them from taking steps which are beneficial to themselves even when they have the resources to do so.14 This would mean that people need not invest in green or ethical projects even if they think that these are desirable and have the resources to make such investments. This also demonstrates the importance of the way policies are framed or announced and the need to design appropriate framing and announcements. For example, a project which is found to be beneficial to all people in a set can be offered in such a way that the default option is to be in’ and it can be made the responsibility of those who do not want to be part of it to opt out’. These are called decision defaults (Benartzi and Thaler, 2004). This may probably be better than giving the choice to opt in’ under certain situations.

The behavioural patterns, like instinctual decision-making, herd behaviour, use of a mental model of reality (which could be different from reality) and inertia, call for widespread dissemination of information on the positive aspects of green and ethical investments, and the creation of a culture’ to encourage people to move towards this direction.

Need for social or green movements and collective actions

Given the number of factors discussed above, which discourage individuals from taking actions which are beneficial for themselves, social networks and other platforms of collective action may encourage individuals to pursue green and social investments. This can be due to different reasons. Networks may strengthen pro-social behaviour and norms;15 these may create shame as a disciplining strategy for the inaction; these may help in spreading information and reducing the uncertainty over newer projects; these may create extrinsic rewards; these may lead to internalization of pro-social behaviour and that can strengthen intrinsic motivation; these may reduce the inertia of some actors, and so on.

Specific objective of philanthropic foundations and impact of this on green and social impact investments

Certain specific features of philanthropic foundations may have to be taken into account while thinking about their incentives to invest in green or social-impact projects. The founding objective of most of these foundations is to contribute to one or the other social purpose and these may include environmental conservation too. Hence, it is to be expected that these foundations would invest in green and social-impact projects, and that is the reality to a great extent. However, most of these foundations plan to work in perpetuity or over a very long period of time. Hence, a foundation would not be interested in spending its whole endowment on a one-time project. Instead, the endowment is invested to generate an annual income, and a part of this income is invested for social purpose/​s.

The desire to exist for a longer period would lead to two processes: (a) investing the endowment in different instruments (shares, bonds, and so on), and (b) using the annual income for social or green investments. Let us consider an extreme case where the financial return from social or green investments is near zero (but the non-monetary return to the foundation and the social return of such investments are very high). If this is the case, the foundation would be interested in investing annual income in social or green investments but may not be interested in investing endowment in such investments. Instead, the endowment would be invested in normal instruments which would yield market-average returns. That could be one reason to see that foundations invest their assets in those investments which maximize the financial value.16 This is so since any loss in the return from the endowment would work against the desire to operate in perpetuity. There could be certain green or social considerations and experiments which try out impact-investing of the assets of foundations.17 For example, these organizations may not buy/​retain shares in a polluting company or that which uses child labour. There are also activists who are concerned about this issue and call for using not only program grants (annual incomes) but also endowments in a way that maximizes social benefits.18 However, financial returns would be an important consideration in determining the portfolio of investments to deploy the assets of foundations. This could be a factor constraining the diversion of the endowments of philanthropic foundations towards green or social-impact projects.19

Let us summarize the key points of the discussion in the Table below.

MotivationImpactImplication for Policy/​Regulation
Profit-motiveInvest as and when green or ethical investments are remunerative (in comparison with alternatives)Interest in green or ethical investments may decline as these become widespread or common
Minimization of losses from normal investmentsInvest in green or ethical investments if people perceive those normal investments may give a lesser return in future due to social scrutinyTightening of the regulation of normal investments based on social or green considerations may spur green or social-impact investments
Demand for public or environmental goodsInvest in green investments for deriving environmental servicesEconomic/​income growth (and other factors such as education) may facilitate the increase in this demand. Policies which facilitate income growth are desirable in this context
Care for welfare of one’s future generationsInvest in green projects; May not drive investment in social impact projectsDepends on the awareness of the impact of environmental damage on the welfare of one’s own future generations
Social value orientation (one’s utility depends on other’s welfare too) – Caring for the welfare of other peopleInvest in social impact projects which benefit the people who are caredDepends on perceptions of the possible connection between one’s welfare and that of others; strategies to facilitate social philanthropy
Extrinsic non-monetary rewardsInvest in green or social projectsDecline in interest as the distinction fades away
Intrinsic motivationInvest in green or ethical projectsPossible conflict with financial incentives
Instinctual decisions; herd behaviour and the use of mental model of realityInvest in green or social impact projects if these get wider acceptanceNeed for popularizing and making green/​social investments attractive initially, Green Nudging
Cognitive myopiaReluctance to invest in projects which yield returns over long-termsNeed a combination of investments which yield medium-term and longer-term returns
InertiaMay not invest even if these are privately beneficialAppropriate framing and announcements; auto-enrolment, default option
Benchmark effectReluctance to invest accumulated endowments in ventures with uncertain returnsPossibility of aligning future incomes with green or social investments; save more tomorrow’
Fairness considerationInvest in social impact projectsNeed to reduce the social distance between the affluent and the poor


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V Santhakumar is Professor, Azim Premji University, Bangalore.

Featured image by Marga Santoso on Unsplash

  1. This can also be partly driven by the care for others.↩︎

  2. For a discussion of this attitude in environmental decision-making see Weber, E. U. (2013).↩︎

  3. If there were such connections, these may have helped in deriving comfort or joy from having helped a specific beneficiary.↩︎

  4. Deci, E. L. (1971). Effects of externally mediated rewards on intrinsic motivation. Journal of Personality and Social Psychology, 18, 105–115.; An interesting case came from a systematic study in Israel (Gneezy et al, 2011). A small section of parents of children in a playschool had been coming late to pick up ftheir wards after school. This created a problem for the caretakers since they had to stay back even if one child was left behind. The playschool instituted a fine to address the problem. Parents who came late were required to pay a fine. Surprisingly, many more parents started to come late. Even those who were coming on time earlier because they felt it was not right to hold the caretakers back beyond their normal working hours, began to come late. This was because when the fine was introduced, they thought that the extra time of the caretakers could be bought without any ill will. This is a case where the introduction of a financial/market incentive led to the disappearance of intrinsic motivation.↩︎

  5. There is some discussion on the relative merit of doing good within religious and secular frameworks. For example, see Gervais (2014).↩︎

  6. For a review, See Lincoln et al (2008).↩︎

  7. The limited literature on Islamic Banking does not demonstrate any significant difference between Islamic Banks and Conventional Banks in terms of profitability (Samad, 2004).↩︎

  8. This is evident from the fact that the proposers divide the fund somewhat evenly even when the responder is not allowed to reject the offer. See Kahneman et al (1986b).↩︎

  9. There could be companies which may give voluntarily a wage rate to its workers which is higher than the market- or legally- determined one. For example, see https://www.cnbc.com/2019/05/24/glassdoor-10-companies-that-have-committed-to-raising-minimum-wage.html↩︎

  10. https://plato.stanford.edu/entries/contractarianism-contemporary/↩︎

  11. For a review, see the World Development Report, 2015.↩︎

  12. The impact of such influences is discussed in Schoenberg (2007).↩︎

  13. This could be similar to the demand externalities discussed in economics. This is discussed in the literature on global finance by papers such Korinek and Simsek (2016).↩︎

  14. Let us take an example. A company decides to have a new pension scheme, which would be beneficial for its employees. The company can announce the scheme in two ways. Either it can ask its employees to register for the new scheme if they want to or it can ask employees to inform the company if someone doesn’t want to be part of it. (In the second case, everybody would be part of the scheme unless someone takes the step to opt out). Based on the understanding of rationality, one would expect that all employees who want to be part of the program would register, irrespective of the two different methods of the announcement. However, experiments have shown that more employees are likely to be part of the program when the second approach is used, in which they are `in’ even without making any effort to be part of it. This is so since getting registered is the default option.↩︎

  15. This is emphasized in Putnam (1995).↩︎

  16. `Typically, that heap of assets is managed like any other, to maximize its financial value.’ https://www.theatlantic.com/business/archive/2017/06/foundations-impact-investment-fb-heron/532101/↩︎

  17. One such case is that of the F B Heron Foundation in New York mentioned in https://www.theatlantic.com/business/archive/2017/06/foundations-impact-investment-fb-heron/532101/↩︎

  18. For example, see the discussion in https://www.pioneerspost.com/business-school/20190729/foundations-and-impact-investing-why-the-heck-it-taking-so-long↩︎

  19. This could be one of the reasons why foundations are less than fully transparent in revealing their portfolio of investments, an issue discussed in https://medium.com/swlh/philanthropys-dark-money-2ed35022afc6. There could be nothing social/green in these investments even if these stand for such projects to be funded by their annual incomes.↩︎