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ESG Investing

Paper Session

Friday, Jan. 7, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Zacharias Sautner, Frankfurt School of Finance & Management

Do Investors Care About Impact?

Florian Heeb
,
University of Zurich
Julian Koelbel
,
University of Zurich
Falko Paetzold
,
EBS University
Stefan Zeisberger
,
Radboud University and University of Zurich

Abstract

We assess how investors’ willingness-to-pay (WTP) for sustainable investments responds to the impact of those investments, using a framed field experiment. While investors have a substantial WTP for sustainable investments, they do not pay more for more impact. This also holds for dedicated impact investors. When investors compare several sustainable investments, their WTP responds to differences in impact but not to the absolute level of impact. Investors experience positive emotions when choosing sustainable investments, irrespective of investments’ impact. Our findings suggest that the WTP for sustainable investments is driven by an emotional rather than a calculative valuation of impact.

Unlocking ESG Premium from Options

Jie Cao
,
Chinese University of Hong Kong
Amit Goyal
,
University of Lausanne
Xintong Zhan
,
Chinese University of Hong Kong
Weiming Zhang
,
Chinese University of Hong Kong

Abstract

Investors’ perceived risk for firms of low ESG performance is high as evidenced by higher option implied volatility. Using delta-hedged option returns, we estimate the risk premium to compensate for such perceived risks in the option market to be about 0.3% per month. The influence of ESG performance on perceived risk and option pricing is stronger for firms that are closer to end-consumers, facing severer product competition, with higher investors’ ESG awareness, and without corporate hedging activity. The effect of ESG performance heightens after the announcement of the Paris Agreement and after the speeches of Greta Thunberg.

On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices

Itay Goldstein
,
University of Pennsylvania
Alexandr Kopytov
,
University of Hong Kong
Lin Shen
,
INSEAD
Haotian Xiang
,
Peking University

Abstract

We study how environmental, social and governance (ESG) investing reshapes information aggregation and price formation. We develop a rational expectations equilibrium model in which traditional and green investors are informed about monetary and non-monetary risks but have distinct preferences over them. Because of their heterogeneous preferences, traditional and green investors learn differently from the asset price and trade in opposite directions based on the same information. We study how a growth of green investors and an improvement in the quality of ESG information affect the asset price and the firm's cost of capital. Our analyses provide a rich set of novel results and testable implications.

Does Socially Responsible Investing Change Firm Behavior?

Davidson Heath
,
University of Utah
Daniele Macciocchi
,
Miami University
Roni Michaely
,
University of Hong Kong
Matthew Ringgenberg
,
University of Utah

Abstract

Socially responsible investment (SRI) funds are increasing in popularity. Yet, it is unclear if these funds improve corporate behavior. Using novel micro-level data, we find that SRI funds select firms with higher environmental and social standards: the firms they hold exhibit lower pollution, greater board diversity, higher employee satisfaction, and higher workplace safety. Yet, both in the broad cross-section and using an exogenous shock to SRI capital, we find no evidence that SRI funds improve firm behavior. The results suggest SRI funds invest in a portfolio consistent with the fund's objective, but they do not significantly improve corporate conduct.

Discussant(s)
Samuel Hartzmark
,
University of Chicago
Kornelia Fabisik
,
Frankfurt School of Finance & Management
Martin Oehmke
,
London School of Economics
Oguzhan Karakas
,
University of Cambridge
JEL Classifications
  • G1 - Asset Markets and Pricing