Abstract: Trillions of dollars are engaged in socially responsible investments (SRI). However, the true underlying mechanism for SRI is yet unknown. In this paper, we formally investigate investors’ belief and ambiguity perception towards the financial performance of an ESG (environmental, social, governance) fund in an
incentivized lab experiment. Participants in our experiment were given exactly the same information about a fund with or without the fund’s high ESG rating between treatments. We find that knowing the high ESG rating increased participants’ return expectations, which is the opposite of what has been found in widely used unincentivized survey studies. Moreover, the high ESG rating made subjects more conservative when updating on negative information and perceive lower ambiguity. This suggests that the unincentivized elicitation of
ESG-related beliefs could be systematically biased. Our results contribute to the understanding of why investors hold high ESG investments and to the design of relevant policies.