ESG Aversion: Uncovering the Hidden Tension Between Profitability and Preference

Environmental, Social, and Governance (ESG) considerations have moved from a fringe concern to a central topic in corporate strategy and investment. Yet, as debates over fiduciary responsibility and ideological overreach intensify, the ESG landscape becomes increasingly polarized and fast evolving. At the heart of the debate lies a fundamental question: do markets really value ESG? And if so, is it because ESG enhances firm value, or because investors value sustainability for its own sake (i.e., the “value versus values” question)

In our recent NBER working paper, we tackle this question with a novel experimental framework designed to disentangle belief-based (financial) and taste-based (non-financial) motives for ESG engagement. We focus on the venture capital (VC) market, a vital and understudied segment of private finance, and examine how both startup founders and investors respond to ESG signals in a two-sided matching context.

Experimental Design: A Real-Stakes Two-Sided Matching Setup

We recruited 409 U.S. startup founders and 129 VC investors to participate in incentivized experiments. Each participant evaluated hypothetical profiles—founders reviewed potential investors, and investors reviewed startups—believing their responses would influence an algorithm that would generate real-world recommendations. We randomly assigned ESG attributes (e.g., an environmental focus) to some profiles and also orthogonally varied other key profile features known to influence participants’ decisions. This allowed us to identify the causal effect of an “ESG label”—the extent to which ESG labelling affected participants’ expressed interest in collaboration with candidates in each profile—while controlling for all other characteristics.

A Revealing ESG Penalty

Across both sides of the market, we find a robust and significant ESG penalty:

• Startup founders were 5.7% less likely to express interest in an ESG-oriented investor compared to an otherwise identical profit-focused investor.
• VC investors were 5.4% less likely to pursue a startup labelled as ESG-driven.

These effects are economically meaningful: for founders, the ESG penalty is on par with effect of the disadvantage associated with an investor lacking entrepreneurial experience. For VCs, its effect is roughly as large as a startup losing one key competitive edge and about 40% of the benefit of having a founder from a top university. Environmental attributes (“E”) drive most of the negative effect, while “S” and “G” have more mixed or muted impacts.

Belief vs. Taste: What Explains the Aversion?

We interpret these results through a framework that decomposes this ESG demand into two channels:

1. Belief-Driven (Informational): ESG labels may signal weaker financial returns or lower likelihood of reciprocated interest. Our data support this view—participants rated ESG profiles as less profitable and less likely to engage. For example, startups rated ESG investors 5% lower on expected value-added to their profitability.
2. Taste-Driven (Non-Pecuniary): To isolate intrinsic preferences, we designed a separate willingness-to-pay (WTP) experiment. Participants could forgo part of a lottery prize to receive additional match recommendations—randomly weighted toward ESG or not—under the condition that match quality remained the same.

Strikingly, once financial concerns were removed, both startup founders and VCs revealed a strong underlying preference for ESG. When match quality was held constant, both groups were more likely to pay for ESG-preferred recommendation lists. In other words, the market does value ESG— but this preference is suppressed by negative beliefs about its financial performance.

Heterogeneous Responses and Practical Implications

The ESG penalty is not uniform as it varies significantly across participants:

• Profit-focused, male, Republican-aligned, and smaller-firm founders exhibit stronger ESG aversion.
• Those with ESG-aligned missions or Democratic affiliations are more neutral or even favourable toward ESG profiles.

These heterogeneities underscore the role of ideology, firm context, and possibly experience in shaping ESG perceptions.

Our findings also carry policy relevance. If ESG aversion is largely driven by misinformed beliefs—especially the perception that ESG implies operational constraints or greenwashing—then information interventions could unlock latent demand. For instance, transparency around ESG fund performance or clearer impact measurement might reduce scepticism.

Conversely, if ESG aversion stems from true financial trade-offs, this suggests that aligning private incentives with public benefits (e.g., via subsidies, tax incentives, or ESG-linked financing) may be necessary to catalyse ESG investment.

Broader Contributions

Beyond the ESG debate, our paper offers methodological contributions to the study of non-pecuniary preferences in financial decision-making. Using field experiments with real incentives, we quantify the magnitude of belief-based and taste-based effects in a realistic, high-stakes context. We also contribute to the literature on entrepreneurial finance by documenting how sustainability labels influence early-stage fundraising—a topic that has received little experimental attention to date.

Conclusion

Our study shows that ESG aversion in private markets is real but not absolute. Under current conditions, negative performance beliefs dominate—but once those are controlled, a hidden preference for ESG emerges. This tension between financial value and personal values defines much of the ESG discourse today.

Whether through better information, policy nudges, or shifting norms, the challenge ahead lies in aligning perceived profitability with the broader social and environmental goals that many market participants already care about.