1. 2-10-2013 SRI: 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

2. 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 3. The Trust Game Paul Smeets Social Preferences and Portfolio Choice 3 Investor 1 Investor 2 x 3 Experimental Intervention Endowment Transfer Return + ? 4. 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 5. 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 Returnratio Amount sent by the 1st mover Socially responsible investors Conventional investors Average 6. Intrinsic Social Preferences Paul Smeets Social Preferences and Portfolio Choice 6 0 10203040 Percent 0 50 100 150 T_d2_exp_50 Amount sent back Percent 7. Paul Smeets Social Preferences and Portfolio Choice 7 Avg. Return Ratio Max. Transfer of 50 Euro Intrinsic social preferences 0.0405** (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 value 0.0431*** (0.0098) 0.0427*** (0.0098) Investment knowledge 0.0189* (0.0107) 0.0186* (0.0107) University degree 0.0390 (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) 8. 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 9. 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 10. 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 11. 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 12. 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 13. 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 14. 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% 15. 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 SRI 1.5537 (0.7548) 0.6964 (0.1571) 1.2696 (0.8042) Log total portfolio value 1.6691** (0.3661) 1.2953*** (0.1078) 2.2811*** (0.7337) Investment knowledge 1.8387*** (0.4252) 1.0812 (0.0942) 1.1280 (0.2629) University degree 0.4103 (0.2275) 1.4316 (0.3346) 4.6472* (3.8557) Other control variables YES N 764 Pseudo R squared 0.0916 16. SOCIAL IDENTIFICATION AND INVESTMENT DECISIONS Rob Bauer and Paul Smeets 2-10-2013 Social Identification and Investment Decisions 16 17. 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 18. 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 19. 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) Cronbachs alpha = 0.916 2-10-2013 Social Identification and Investment Decisions 19 20. 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 21. 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 22. OVERALL CONCLUSION 2-10-2013 Social Identification and Investment Decisions 22 23. 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 investors 2 Social identification larger allocations to socially responsible banks 3 24. 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 25. Which type of investor are you? More information www.paulsmeets.eu Paul Smeets Social Preferences and Portfolio Choice 25