Working Papers

The Surprising Performance of Green Retail Investors: A New (Behavioral) Channel

with Sumit Agarwal, Pulak Ghosh, Hong Zhang, and Jian Zhang

Abstract: Contrary to the prevailing wisdom that green investors willingly accept lower returns for sustainable investment, our analysis of account-level data from a major Indian bank indicates the opposite. We find that investors with a higher proportion of green stocks in their portfolios achieve superior risk-adjusted portfolio returns. To explain this surprising observation, we hypothesize—and empirically verify—that green investments may help investors mitigate detrimental behavioral bias, such as the disposition effect and under-diversification. Alternative mechanisms related to stock selection ability, aggregate demand shocks, and risk mitigation fail to explain green performance. Instead, tests utilizing abnormal temperatures as exogenous shocks support a causal interpretation of our findings. These results suggest a novel behavioral channel for fully understanding the implications of green preferences.