Abstract
We present a lab-in-the-field experiment on portfolio choices involving finance professionals, complemented by a sample of undergraduate students, where green and brown assets generate environmental externalities. Building on an extension of the Markowitz (1952) mean-variance model (Gasser et al., 2017), we examine how return, risk, and environmental preferences interact. Participants exhibit pro-environmental behavior, showing stronger aversion to brown assets than attraction to green ones. Environmental concerns drive a return-externality trade-off but do not induce greater risk-taking for greener assets. Professionals display stronger environmental preferences than students, who remain more return-sensitive. Despite individual deviations, the model offers a good first-order approximation at the aggregate level. Our findings challenge the assumption that ESG preferences can be accommodated simply by adjusting risk-return profiles, revealing that sustainable finance may struggle without risk-mitigating mechanisms when environmental impact implies elevated financial risk.