TY - JOUR
T1 - Sustainable investing with ESG rating uncertainty
AU - Avramov, Doron
AU - Cheng, Si
AU - Lioui, Abraham
AU - Tarelli, Andrea
PY - 2022
Y1 - 2022
N2 - This paper analyzes the asset pricing and portfolio implications of an important barrier to sustainable investing: uncertainty about the corporate ESG profile. In equilibrium, the market premium increases and demand for stocks declines under ESG uncertainty. In addition, the CAPM alpha and effective beta both rise with ESG uncertainty and the negative ESG-alpha relation weakens. Employing the standard deviation of ESG ratings from six major providers as a proxy for ESG uncertainty, we provide supporting evidence for the model predictions. Our findings help reconcile the mixed evidence on the cross-sectional ESG-alpha relation and suggest that ESG uncertainty affects the risk-return trade-off, social impact, and economic welfare.
AB - This paper analyzes the asset pricing and portfolio implications of an important barrier to sustainable investing: uncertainty about the corporate ESG profile. In equilibrium, the market premium increases and demand for stocks declines under ESG uncertainty. In addition, the CAPM alpha and effective beta both rise with ESG uncertainty and the negative ESG-alpha relation weakens. Employing the standard deviation of ESG ratings from six major providers as a proxy for ESG uncertainty, we provide supporting evidence for the model predictions. Our findings help reconcile the mixed evidence on the cross-sectional ESG-alpha relation and suggest that ESG uncertainty affects the risk-return trade-off, social impact, and economic welfare.
KW - Capital Asset Pricing Model
KW - ESG
KW - Portfolio Choice
KW - Rating Uncertainty
KW - Capital Asset Pricing Model
KW - ESG
KW - Portfolio Choice
KW - Rating Uncertainty
UR - http://hdl.handle.net/10807/183993
UR - https://www.sciencedirect.com/science/article/pii/s0304405x21003974
U2 - 10.1016/j.jfineco.2021.09.009
DO - 10.1016/j.jfineco.2021.09.009
M3 - Article
SN - 0304-405X
SP - 642
EP - 664
JO - Journal of Financial Economics
JF - Journal of Financial Economics
ER -