Imagine you are choosing between two similar investment options. One has a green label, promising to fund climate-friendly projects and assets. The other offers a slightly higher return but has no green label. Which do you choose?
My recent study explored this question. My co-researchers and I found that, for most retail investors – individual, non-professional investors – the 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.
This finding raises critical questions about how sustainable finance is marketed and whether green labels alone are enough to drive real environmental change.
Green bonds and retail investors
Green bonds are a financial tool designed to fund environmentally friendly projects. Institutional investors and governments have embraced them, but their adoption by everyday retail investors remains low.
The Canadian market was one of the first to provide access to retail-level green bonds, but demand for such bonds was always oversubscribed. Low interest rates made it difficult to balance investor returns with lending profits. This imbalance squeezed sustainable investment firms like CoPower, which ultimately led to its green bond model winding down.
With the urgent need to attract capital for climate financing, the role of retail investors is now a key topic of discussion. In 2021, these investors accounted for 52% of global assets under management in 2021 – a figure expected to jump to nearly 61% by 2030. This presents a massive opportunity to mobilize private capital toward sustainable finance.
However, before retail investors venture into the green bond market, the sustainable finance sector must address a key question: do people invest in green bonds because they believe in their environmental benefits or simply because of the “green” label?
And, more importantly, does the green label alone persuade retail investors to accept a “greenium” – choosing a lower-return green bond over a higher-return non-green bond – like professional investors do?
The ‘green-label effect’ is real
To determine this, my co-researchers and I conducted an experiment with more than 1,000 self-identified retail investors to see how different framing techniques – such as labels, environmental impact and reporting descriptions – shaped their willingness to invest in green bonds.
Our study identified a “green label effect.” Most retail investors relied on green labels as a shortcut to save time and avoid having to evaluate the environmental impact of a bond. Investors often relied on simplified decision cues like labels and financial returns to navigate complex financial information.
However, a small subset of environmentally conscious investors researched the validity of green bonds and aligned their investments with their values, even at the cost of lower returns. This highlights the need for green bonds that offer a competitive return, given that a majority still invest based on financial returns in addition to labelling. Labelling alone is not enough to drive mainstream retail investment in sustainable finance.
Our study also found that certain types of personal characteristics made people more likely to invest in labelled green bonds, even if those bonds had the lowest financial returns. Investors with a high-risk tolerance were more likely to invest in green bonds.
Additionally, previous investment experience played a role. Those who had moderately invested in stocks had none to high levels of experience investing in bonds.
The greenwashing challenge
Our findings highlight both the potential and pitfalls of sustainable finance. The popularity of green-labelled bonds suggests that retail investors are open to sustainable investment and would help to drive growth in this market considerably.
However, the fact that many choose labels without finding out whether the bond is actually green raises concerns about greenwashing. This practice occurs when companies exploit sustainability branding and use green labels on non-green bonds to avoid delivering environmental impact.
ostdoctoral fellow at the Institute of the Environment, L’Université d’Ottawa/University of Ottawa.
This article was first published by The Conversation. It has been edited to conform with Corporate Knights style. Read the original article here.
