Abstract
<jats:p>We analyze whether households’ investment decisions in ESG assets can be explained by their preferences for sustainability or by their beliefs about future returns. To address this question, we develop a structural discrete-choice model with heterogeneous beliefs and preferences. Using a large-scale survey with randomized mutual fund allocation scenarios and elicited return expectations, we recover individual-level willingness to pay for sustainability (and financial risk). Our specification does not restrict investors’ willingness to pay for sustainability to be positive, allowing the data to determine both the magnitude and direction of sustainability preferences at the individual level. The results show that beliefs about expected returns are the driving factor for investing in sustainable assets and non-pecuniary preferences for sustainability play only a secondary role. Moreover, respondents’ return beliefs exceed the beliefs implied by the model’s equilibrium predictions.</jats:p>