Understanding drivers when investing for impact: an experimental study

Impact investing, aiming for both financial returns and social/environmental benefits, has seen substantial growth. While research focuses on impact measurement, less attention has been given to understanding investor behavior and decision-making. This study addresses this gap by investigating socio-demographic characteristics and behavioral drivers that influence the choice between impact funds and traditional investments. The research aims to identify factors that make impact investing more appealing and to determine who is most receptive. This understanding is valuable for both behavioral economics and for designing effective strategies to promote impact investing, including awareness campaigns, marketing, and policy. The study examines the effects of prior knowledge about impact investing, the presentation of investment instruments, the trade-off between financial return and social impact, and the influence of external factors like government incentives.

Existing literature primarily focuses on impact assessment and measurement frameworks for environmental and social returns from investments. While crucial for effectiveness and transparency, this focus leaves a significant research gap regarding the socio-demographic characteristics and behavioral drivers that influence investors' choices between impact and traditional funds. This paper aims to fill this gap by exploring the factors that influence impact investing decisions and examining the role of behavioral drivers in promoting impact investments.

The study employed an experimental design using a web-based platform (oTree). Two groups participated: 541 non-experts (likely unfamiliar with impact investing) and 61 experts (professionals in the field). Participants completed a demographic questionnaire and an effort task to determine their investment budget, simulating real-world financial stakes. The core of the experiment involved eight multiple-choice investment scenarios, each presenting choices between traditional and impact investment options. These scenarios varied in several factors: simple return comparison, various social return levels, additional details on social impact, risk of no return, inclusion of fiscal benefits (tax deductions), and the addition of visual aids (images). Logistic regressions analyzed the data to isolate the effect of each variable on investment choices.

The results show a general preference for impact investment funds (IIFs) over traditional investment funds (TIFs), especially among women, older individuals, and experts. Women consistently favored IIFs over TIFs across most scenarios, even when higher risk was associated with IIFs. Older participants also displayed a greater preference for IIFs, contrary to expectations favoring younger generations. Experts in the field showed a stronger inclination towards IIFs. Education level did not significantly impact investment choices. While prior knowledge of impact investing had a small effect, a video introducing the concept notably increased the likelihood of choosing IIFs. Providing additional details about the social impact of the funds, particularly with the inclusion of visual aids, substantially increased the preference for IIFs. Surprisingly, fiscal incentives (tax deductions) did not significantly affect investment choices, except for experts and older participants. The inclusion of a risk factor (chance of no return) reduced the likelihood of choosing IIFs for both men and women.

The findings demonstrate that demographic factors and the way investment options are presented significantly influence investment decisions. Women and older individuals show a greater propensity for impact investing, potentially due to inherent altruism and a desire to leave a positive legacy. Experts, unsurprisingly, favored IIFs due to their familiarity and likely alignment with personal values. The lack of significant impact from fiscal incentives suggests that traditional policy approaches may be insufficient. Instead, emphasizing the social impact, particularly through visual aids and clear information, proves highly effective. The study highlights the importance of targeted communication and education to promote impact investing.

This study demonstrates the significant influence of demographic factors, risk perception, and information presentation on impact investment choices. Women, older investors, and experts exhibit a stronger preference for impact investments. While fiscal incentives showed limited effectiveness, providing detailed and visually engaging information about the actual social impact is a powerful driver. Future research should explore the impact of public disclosure of investment choices and the design of more effective incentive schemes. Incorporating impact investing into financial curricula is recommended.

The study's sample size for experts is a limitation. Recruiting and retaining experts for such experiments requires considerable resources. The experimental setting, while striving for realism through incentives and effort tasks, might not fully replicate real-world investment decisions. The use of specific social cause scenarios in questions and different risk aversion profiles among the subjects might also influence their results.