Why do many retail investors buy SRI funds and why do others stay away from SRI?

2-10-2013SRI: Return Expectations or Social

Preferences?1

Why do many retail investors buy SRI

funds and why do others

stay away from SRI?

ECCE Webinar, October 2, 2013Paul Smeets

Overview of papers in this webinar

• Social Preferences and Portfolio Choice(with Arno Riedl)

– Robeco

• Social Identification and Investment Decisions(with Rob Bauer)

– ASN Bank

– Triodos Bank

www.corporate-engagement.com

www.paulsmeets.eu

2-10-2013 Paul Smeets 2

The Trust Game

Paul Smeets Social Preferences and Portfolio Choice 3

Investor 1 Investor 2

x 3

Experimental

Intervention

Endowment

Transfer

Return

+

?

The Trust Game

1. Invitation of all socially responsible investors

2. Random selection of conventional investors

3. Real money at stake

4. Internet experiments

5. Match to administrative investor data

6. Anonymous

The Procedure

Paul Smeets Social Preferences and Portfolio Choice 4

Intrinsic Social Preferences

Paul Smeets Social Preferences and Portfolio Choice 5

1.00

1.10

1.20

1.30

1.40

1.50

1.60

5 10 15 20 25 30 35 40 45 50

Retu

rn r

ati

o

Amount sent by the 1st mover

Socially responsible investors Conventional investors Average

Intrinsic Social Preferences

Paul Smeets Social Preferences and Portfolio Choice 6

01

02

03

04

0

Pe

rcen

t

0 50 100 150T_d2_exp_50

Amount sent back

Pe

rce

nt

Paul Smeets Social Preferences and Portfolio Choice 7

Avg. Return Ratio Max. Transfer of 50 Euro

Intrinsic social preferences0.0405**

(0.0205)

0.0080**

(0.0040)

Lower expected returns on SRI-0.0295

(0.0271)

-0.0295

(0.0271)

Lower perceived risk on SRI-0.0257

(0.0267)

-0.0253

(0.0267)

Log total portfolio value0.0431***

(0.0098)

0.0427***

(0.0098)

Investment knowledge0.0189*

(0.0107)

0.0186*

(0.0107)

University degree0.0390

(0.0281)

0.0383

(0.0281)

Risk preferences-0.0003

(0.0003)

-0.0003

(0.0003)

Other control variables YES

N 764

Pseudo R squared 0.0522 0.0525

Likelihood to own a SRI Fund (probit)

Return Expectations &

Risk Perceptions

Paul Smeets Social Preferences and Portfolio Choice 8

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1 2 3 4 5 6 7

Socially responsible investors Conventional investors

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

much lower a bit lower the same a bit higher much higher

Socially responsible investors Conventional investors

Average expected risk:

Socially responsible: 3.55

Conventional: 3.57

Contribution of this paper

Only heterogeneity in risk preferences and

expected returns matter for portfolio choices

Lower financial performance

– Hong and Kacperczyk (2009)

– Renneboog, Ter Horst and Zhang (2008)

Higher or similar financial performance

– Bauer, Otten and Koedijk (2005)

– Derwall et al. (2005)

– Edmans (2011)

Traditional finance theory

Mixed evidence on financial performance of SRI

Paul Smeets Social Preferences and Portfolio Choice 9

Contribution of this paper

First to explain portfolio choices with

direct measures of social preferences

Suggestive evidence that social preferences influence

investment decisions

– Hong and Kostovetsky (2012), JFE

– Kaustia and Torstila (2011), JFE

– Hong and Kacperczyk (2009), JFE

– Bollen (2007), JFQA

– Kumar and Page (forthcoming)

Our contribution

Recent evidence

Paul Smeets Social Preferences and Portfolio Choice 10

Individual-Level Data

1. Return expectations

2. Investment knowledge

1. Trust game

2. Risk preference task

Transaction data: January 1992 to August 2012

1. Monthly amounts invested in SRI funds and in all

other funds

2. Investor portfolio returns

3. Basic investor characteristics

Field behaviorA

Incentivized ExperimentB

SurveyC

Paul Smeets Social Preferences and Portfolio Choice 11

SRI Funds at Robeco

Paul Smeets Social Preferences and Portfolio Choice 12

Two types of SRI funds

– SRI equity funds without tax incentives

– SRI bond funds with tax incentives

Classification of SRI fund in accordance to tax code or Robeco

SRI Funds at Robeco

Paul Smeets Social Preferences and Portfolio Choice 13

• SRI funds without tax benefits

– Fund managers are not influenced by the government in

the selection of companies

• SRI funds with tax incentives

– Meet certain criteria of the government

– Fund managers are restricted in their selection of

companies by the government

– Tax benefits of up to 2.2% in June 2011 when investors

participated in the experiments

Administrative Data

Paul Smeets Social Preferences and Portfolio Choice 14

Conditional on

owning a SRI fund

Percentage SRI in total portfolio 14.9%

Only with tax benefits 19.5%

Only without tax benefits 68.4%

Hold both 12.1%

SRI Funds with & without Tax Benefits

(multinomial logit)

Paul Smeets Social Preferences and Portfolio Choice 15

SRI funds: tax benefits with without with & without

Intrinsic social preferences

(average return ratio)

0.8089

(0.2717)

1.4791**

(0.2626)

1.9400

(1.0638)

Lower expected returns on

SRI

1.4309

(0.7585)

0.7319

(0.1612)

0.5519

(0.3549)

Lower perceived risk on SRI1.5537

(0.7548)

0.6964

(0.1571)

1.2696

(0.8042)

Log total portfolio value1.6691**

(0.3661)

1.2953***

(0.1078)

2.2811***

(0.7337)

Investment knowledge1.8387***

(0.4252)

1.0812

(0.0942)

1.1280

(0.2629)

University degree0.4103

(0.2275)

1.4316

(0.3346)

4.6472*

(3.8557)

Other control variables YES

N 764

Pseudo R squared 0.0916

SOCIAL IDENTIFICATION AND

INVESTMENT DECISIONS

Rob Bauer and Paul Smeets

2-10-2013 Social Identification and Investment Decisions 16

ASN Bank and Triodos Bank

• The only two exclusively socially responsible

banks in the Netherlands

• Offer a wide variety of SRI mutual funds and

savings accounts

2-10-2013 Social Identification and Investment Decisions 17

Social Identification

• Individuals often identify with a group or

company that shares their personal values

– Tajfel and Turner (1979)

– Mael and Ashfort (1992)

– Akerlof and Kranton (2000, 2005)

• How does social identification affect investment

decisions?

2-10-2013 Social Identification and Investment Decisions 18

Measure of Social Identification

• I can identify myself well with socially responsible investments (1-7)

• I feel good about owning socially responsible mutual funds

• Socially responsible investments fit me well

• I feel attached to socially responsible investments

• Scale adapted from Mael and Ashfort (1992) and Homburg, Wieseke and Hoyer (2009)

Cronbach’s alpha = 0.916

2-10-2013 Social Identification and Investment Decisions 19

Main Results

2-10-2013 Social Identification and Investment Decisions 20

Percentage

at the Bank

Amount Invested

at the Bank (log)

No of Conventional Investments

Accounts (non-SRI)

No of Savings

Accounts

Social Identification 4.829***

[0.819]

0.635***

[0.07]

-0.128***

[0.017]

-0.177***

[0.022]

Lower Expect Returns SRI -2.98

[1.975]

-0.424***

[0.157]

0.004

[0.047]

0.083

[0.064]

Higher Expect Returns SRI 0.181

[1.908]

-0.02

[0.142]

-0.039

[0.043]

-0.134**

[0.056]

Not Know Return Expect -9.691

[6.055]

-0.097

[0.616]

0.008

[0.099]

0.149

[0.166]

Lower Perceived Risk SRI 3.314*

[1.702]

0.083

[0.138]

0.047

[0.039]

-0.015

[0.052]

Higher Perceived Risk SRI 1.866

[2.912]

0.156

[0.239]

0.02

[0.063]

0.027

[0.087]

Not Know Risk Perceptions 7.851

[6.668]

-0.418

[0.762]

-0.054

[0.107]

-0.157

[0.175]

Other Control Variables Yes Yes Yes Yes

Adjusted-R2 0.095 0.272 0.175 0.168

n obs. 1,157 895 2,763 2,766

Main Results

• Social identification

important driver of allocations to

socially responsible banks

investment in familiar companies,

employer stocks, etc

• Expected returns and perceived risk on SRI

small influence on allocations to

socially responsible banks

2-10-2013 Social Identification and Investment Decisions 21

OVERALL CONCLUSION

2-10-2013 Social Identification and Investment Decisions 22

Intrinsic social preferences investments in SRI mutual

funds without tax benefits

Conclusion

Paul Smeets Social Preferences and Portfolio Choice 23

1

Tax incentives crowd out the intrinsic motivation of

socially responsible investors2

Social identification larger allocations to socially

responsible banks

3

Implications for Practice

Paul Smeets Social Preferences and Portfolio Choice 24

1

2

3 Government gives tax incentives:

Changes the clientele for SRI

Reducing tax incentives likely scares away selfish investors

Carefully consider whether to stress financial returns or social responsibility in advertisements/when giving advice

Many investors care about more than risk and return

long run effects on asset prices

Which type of investor are you?

More information

www.paulsmeets.eu

Paul Smeets Social Preferences and Portfolio Choice 25