Doing good in good times only? Uncertainty as contingency factor of warm-glow investment

Recent studies in investor behavior have put forth a so-called warm-glow theory, suggesting that investors appear to have developed a preference for socially responsible investments. The theory explains why investors appear willing to pay a premium for responsible assets. According to recent reports, however, Covid-19, supply chain uncertainties, and the recent surge in inflation have led to a resurgence of investment in what could be considered non-responsible assets. Investor sentiment thus appears to have changed. Our research question in this paper is whether market uncertainty acts as a contingency variable of warm-glow preferences, such that in times of crisis, investors lose the taste for responsible assets, in favor of the preservation of their consumption and wealth. Exploring a global sample of 882 financial sector firms over two decades, we use panel regressions to link both operating and stock performance to environmental, social, and governance (ESG) ratings. We break down our sample into periods of low and high uncertainty. Our results indicate that uncertainty may moderate investors’ warm-glow preferences, as hypothesized. Thus, our study adds uncertainty as an important contextual contingency to discussions on socially responsible investing: investors may be willing to do good in good times only.