Even though there is no empirical evidence that ESG investing reduces returns or corporate profits, the idea that ESG investors sacrifice shareholder value for their values is one of the most persistently repeated prejudices against these investments.
Even if investors don’t openly admit to these biases, they are certainly susceptible to them Ye Zhang and Eric Zou have demonstrated with two experiments. They recruited 409 US startup founders and 129 venture capitalists and gave each of them 16 counterparties to assess.
Startup founders were asked which VC they would like to contact and how much funding they would request. Venture capital funds were asked which start-up companies they would like to contact and how much funding they would be willing to provide based on the information initially provided. The trick was that half of the counterparties presented to the volunteers randomly showed not only financial information, but also that the counterparty placed special emphasis on ESG issues.
The chart below shows how the additional ESG information changed willingness to reach out and funding amount when an otherwise identical counterparty emphasized ESG issues.
Reduction in willingness to contact and finance due to ESG emphasis
Source: Zhang and Zou (2025)
The bars on the left side of the graph show that startup founders are 1.28 percentage points less likely to contact a venture capital fund that emphasizes ESG in its investment priorities, and the amount of funding requested is also reduced (by about 0.8%). The bars on the right side of the chart show that VC firms are about 3.1 percentage points less likely to contact startups that focus on ESG, compared to startups that don’t mention ESG in their pitch materials and tend to invest about 5% less in them.
However, the effect was almost entirely due to conventional startup founders and venture capital firms. Founders who were themselves interested in ESG topics were slightly more likely to contact VCs that emphasize ESG in their profiles, and vice versa. This creates a segregation effect, where ESG investors and ESG startups are more likely to do business with each other and non-ESG companies and investors do the same, while non-ESG companies and investors are reluctant to jump the fence.
But the good news is that this reluctance can be overcome. When asked what is driving the reluctance to invest in SG startups, VCs said startups may not focus enough on profits and growth and can be distracted by their ESG goals. Startup founders, meanwhile, argued that venture capital firms that emphasize ESG in their profiles may be placing too many restrictions on the startup to scale quickly.
When the researchers did a follow-up experiment in which they first addressed profitability issues and convinced VC firms that a startup is a good investment from an economic perspective alone, and then introduced ESG objectives, VCs were more likely to invest in startups that emphasize ESG issues. But as always, profits come first and ESG comes second.
#ESG #segregation