ESG Study: Addressing the Business Tension Between Profitability and Preference

A detailed study of startup founders and venture capital investors finds an interesting gap between financial concerns and positive perceptions about ESG (environmental, social, and governance) perceptions. More evidence of the impact of ESG on performance would help the field, the authors contend.

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A survey and empirical study of 409 US startup founders and 129 venture capital investors finds that the concept of ESG is penalized because of beliefs about weaker financial returns, not lack of intrinsic interest in the concept. The authors find a “hidden demand” for ESG if perceptions about performance improve, suggesting a current misalignment between personal values and investment decisions.

According to authors, “The study shows a real ESG penalty in private markets today, but also a latent ESG preference that surfaces when financial doubts are removed. The ESG debate is less about whether investors ‘care’ and more about whether they believe ESG is financially sustainable. Overcoming this belief gap—via better data, norms, or incentives—could shift ESG from a perceived liability to a shared value driver.”

Harvard Law School Forum

The study, ESG Aversion: Uncovering the Hidden Tension Between Profitability and Preference, authored by Ye Zhang (Stockholm School of Economics) and Eric Zou (University of Michigan and NBER), and posted in the Harvard University Law School Forum for Corporate Governance, evaluated hypothetical profiles (founders rated investors; investors rated startups) in which:

ESG attributes were randomly assigned to profiles while holding other attributes constant.
Incentivized setup: participants believed evaluations influenced real-world recommendations.
A willingness-to-pay (WTP) experiment further isolated non-financial (“taste-based”) preferences.

The study found that founders are less likely to prefer ESG-oriented investors and venture capitalists less likely to pursue ESG-labelled startups. The magnitude is comparable to other major disadvantages (e.g., losing entrepreneurial experience or a competitive edge). The penalty was strongest for environmental versus social and governance issues.

ESG signals perceived weaker profitability and less value-added, with startups expected to have lower returns. However, when financial concerns were removed, both founders and VCs were willing to pay for ESG-preferred recommendations, suggesting to the authors underlying demand for ESG is suppressed by negative beliefs about financial returns.

The study finds stronger ESG aversion among profit-focused, male, Republican-aligned, and smaller-firm founders. More neutral and favourable responses come from founders with ESG missions, Democratic-aligned, or larger firms.

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