The Sustainability Preferences of Individual and Institutional Investors

Abstract

Many investors delegate their investment decisions to professional asset managers who may have very different preferences on non-pecuniary benefits. We compare the sustainability preferences of institutional investors to other investors, using the universe of holdings in bonds traded in Norway in the years 2010-20. We identify sustainability investors as those who choose Green Bonds over similar non-green bonds by the same issuers. Although Green Bonds only constitute a small fraction of portfolios, their investors exhibit a distinct investment strategy. In theory, the utility derived from green preferences allows investors to take on more financial risk. Indeed, individual investors hold riskier portfolios with higher volatility and more defaults, although financial investors do not. Our results suggest that individual Green Bond investors have non-pecuniary green preferences but are not representative of the majority of sustainable investment in the market.

Keywords: Sustainable finance, Climate change, Green Bonds, Impact investing, Individual investors

JEL Classification: G14, G32, Q56, M14