How green bond labelling impacts investment behaviour

The Smart Prosperity Institute, a Canadian research network and think tank, has shared significant new research findings on green bonds and sustainable finance.

The study —“To label or not? A choice experiment testing whether labelled green bonds matter to retail investors” — reveals how green bond labelling influences retail investor behaviour, finding that for most investors the mere presence of a green label mattered more than the actual environmental impact of the bond — or the higher financial return of a non-green option — when selecting investments.

These surprising findings have clear, timely implications for sustainable finance policy: from regulating growth of products through labelling schemes like green taxonomies, to addressing greenwashing risks through improved oversight. The so-called “green label effect” underscores the need for credibility, transparency and stronger investor protections to guard against greenwashing, without stifling market growth. Compelling demographic trends also emerged, offering fascinating insights into modern investor motivation and behaviour.

Abstract overview

Green bonds are an important sustainable finance tool that can help reorient financial flows and influence public policy in addressing climate action across the global financial markets. However, this market is still in its infancy for the retail investor segment, and it has not been sufficiently examined from a behavioural policy lens.

The report authors fill this research gap by examining whether labelling and environmental benefits framing of a green bond can influence retail investor decision-making. By employing 1105 Amazon Mechanical Turk workers across three choice scenarios, we test whether alignment of pro-environmental personal norms or having specific personal traits can have a mediating effect on their green bond preferences.

Using a mix of quantitative analyses, they find that most retail investors are influenced by the presence of a “green label effect”. For most retail investors, we find that the presence of a green label matters more than the “greenness” of a green bond or the higher financial return of a non-green bond.

However, for a very small sub-set of the sample, the alignment of environmental performance-related framing with pro-environmental personal norms, enables greater investment into enhanced performance green bonds, even at the cost of losing financial returns. Finally, personal traits like individual risk tolerance (high), or previous investment experience with investment products (bonds, stocks), gender (non-binary individuals) and those having employment experience with financial industry, are more likely to invest in a labelled green bond.

The findings have timely implications for sustainable finance public policy, as it relates to regulating the growth of such products through labelling schemes like green taxonomies as well as addressing greenwashing risks through improved regulatory oversight.

For further information, click here.