In recent years, the financial industry has been increasingly pressured to actively contribute to addressing critical societal challenges, such as climate change. Now, many investors expect their money to be managed in a way that promotes positive environmental and social change. Given these expectations, there is a growing interest in understanding the real impact of the “sustainable finance” phenomenon. A so-far overlooked aspect is the spillover effect of sustainable finance on the likelihood of advancing formal sustainability-related regulation. Is sustainable finance a “dangerous placebo,” i.e., a red herring drawing off energy and attention from more effective solutions, as some of its critics argue? Or, is it a way to partially compensate for inefficiently lax regulation not crowding out, and possibly crowding in, traditional political efforts? Understanding whether sustainable finance substitutes for, or complements, sustainability-related political engagement is of first-order importance to understanding its impact on society.
In Heeb, Kölbel, Ramelli, and Vasileva (2023), we provide the first experimental evidence on the role of sustainable finance for individual political engagement. We exploit the occurrence of a real climate-related popular vote in Switzerland, the “Climate and Innovation Act” referendum held on June 18, 2023, which asked citizens whether or not to approve climate legislation aiming to accelerate the country’s transition to renewable energies and achieve climate neutrality by 2050. We recruited a sample of 2,051 respondents representative of the Swiss population. The survey was conducted in May 2023, during the main campaigning phase, and finished before the onset of voting by mail. The experiment consists of three steps.
In the first step (“Investment stage”), we randomly assign participants to a control and a treatment group. We ask participants to allocate 1,000 CHF (1,100 USD) to either of the two real investment funds. Importantly, we make this decision consequential: we randomly extract 10 participants, invest 1,000 CHF in their selected fund, and pay them the resulting capital after one year. In the control group, we provide participants only with information on the standard financial characteristics of the two investment options. In the treatment group, we reveal that one of the two funds is a climate-conscious fund (“Climate fund”) and provide information about both funds’ climate-related performance.
In the second step (“Political stage”), we provide participants with an overview of the upcoming climate referendum and a neutral summary of the main arguments of the pro- and anti-climate-law campaigns (see Figure 1). We then offer participants the opportunity to donate part of their payout to either of the two political campaigns. We implement the chosen donation immediately for the ten randomly selected participants and deduct the amount donated from their potential payout. Our primary dependent variable of political engagement is the net average donation supporting the climate law, with the donations to the anti-climate-law campaign treated as negative.
Figure 1 shows Switzerland’s pro- and anti-climate-law 2023 referendum campaigns. The panel on the left is the slogan of the pro-climate-law campaign, which translates to “Protect what is important to us. Vote Yes.” The panel on the right is the slogan of the anti-climate-law campaign, which translates to “Exacerbate the energy crisis? No to the electricity-eater-law.” Both campaign web pages prominently feature a “donate” button.
In the third step (“Survey stage”), we assess respondents’ perceptions of the climate protection benefits of the funds, their emotional responses, and their financial expectations regarding the investment options. In addition, we collect various preferences and demographic characteristics.
The results of the experiment are as follows. First, indicating the salience of our treatment, we confirm individuals’ preferences for sustainable investment products; respondents are almost three times more likely to choose the climate fund when explicitly labeled as such in the treatment group (75% vs. 26%, see Figure 2).
Figure 2: This graph shows the fraction of respondents choosing the climate fund in the control and treatment groups. Participants received climate-related information about the two funds only in the treatment group. The bars indicate 95% confidence intervals.
Second, our findings indicate that investors, on average, overestimate the societal impact of sustainable investing. We randomly assigned participants in the treatment group to two subgroups. For the first group, we assess the perceived benefits of climate protection from investing in the climate fund; for the second group, we assess the perceived benefits of investing in the climate fund’s largest holding firms. The idea is that, under an unbiased view, investors should perceive a fund’s societal impact to be similar to the value-weighted impact of its holdings. This is not what we observe: Respondents perceive investments in the climate fund to be significantly more impactful than investments in its ten largest holdings (Figure 3).
Figure 3: This figure shows the average perceived climate protection impact of investing in the climate fund compared to the average perceived impact of investing in its ten largest holding companies. Impact perceptions are assessed for the treatment group; fund and holdings level perceptions are measured separately in two randomly assigned subgroups. The perceived impact is measured on a 7-point Likert scale; positive values indicate agreement with an investment making a meaningful contribution to climate protection; negative values indicate disagreement. The bars indicate 95% confidence intervals.
Third, we study the effect of the sustainable finance treatment on political support for climate regulation. We find that the average net donation in favor of the pro-campaign in the treatment group is not statistically significantly different (and is even larger) than in the control group (35.1 CHF vs. 31.2 CHF, see Figure 4). We observe a similar positive but non-statistically significant treatment effect on the intention to vote for the climate law. The results indicate that the option to invest climate-consciously does not erode political support for climate regulation.
Figure 4: This graph shows the effect of our sustainable finance treatment on the average pro-campaign net donation (treating donations to the anti-campaign as negative). The bars indicate 95% confidence intervals.
Finally, we explore the cross-sectional heterogeneity of the results. We find no evidence of a differential effect of sustainable finance on individual political engagement along the political spectrum or based on the perceived climate-protection benefits of the climate fund, further supporting the interpretation that sustainable finance does not crowd out political engagement.
Although sustainable investing may be a placebo in the sense that investors believe a climate fund has a greater impact than its main ingredients, we do not find evidence that it is dangerous in the sense of distracting people from engaging on the political front. This result has important practical implications. One of the most powerful criticisms against the sustainable investing movement is that not only it has little direct environmental and social impact, but it also distracts us from adopting harder-to-implement but more efficient political solutions to societal problems. Our experiment suggests that this appealing narrative fails to describe actual individual behavior.
Of course, the likelihood of advancing climate regulation also depends on how policymakers and regulators perceive sustainable finance: as either a call for action or an outsourcing of their responsibilities. Our experiment informs them that, on average, voters do not consider sustainable finance a substitute for political action.
Florian Heeb is a postdoctoral associate at the MIT Sloan School of Management.
Julian F. Kölbel is an assistant professor at the University of St. Gallen (Switzerland), a Swiss Finance Institute faculty member, and an MIT Sloan School of Management research affiliate.
Stefano Ramelli is an assistant professor at the University of St. Gallen (Switzerland) and a faculty member at the Swiss Finance Institute.
Anna Vasileva is a Ph.D. candidate at the University of Zurich (Switzerland).
This post is adapted from their paper, “Is sustainable finance a dangerous placebo?” available on SSRN.