Opening the Black Box of Sustainable Investing: Examining the Impact of Psychological Distance

ABSTRACT This study examines the effects of psychological distance on investors' reaction to sustainability controversies. Based on two stated choice experiments among 142 German and 136 French student participants, we find evidence that respondents react more strongly to controversies which are perceived as less distant in social, spatial, or hypothetical terms. As the main contribution of our study, we demonstrate the impact of psychological distance on sustainable investment preferences, showing that perceptions of sustainability and resultant investment decisions are, in fact, conditioned by different interrelated types of psychological distance. Unlike prior studies that treat sustainability preferences as static or binary, our findings reveal how psychological distance dynamically moderates investor reactions to ESG controversies, offering a more nuanced behavioral perspective on sustainable finance. We thereby extend prior research into inconsistent preferences in sustainable investment behavior. These findings stress the importance of accounting for behavioral aspects when trying to understand why market participants decide for or against sustainable investments.