Sustainable investment under ESG volatility and ambiguity

Deqing Luo, Xun Shan, Jingzhou Yan and Qianhui Yan

Economic Modelling, 2023, vol. 128, issue C

Abstract: This paper investigates the impacts of ambiguity regarding environmental, social, and governance (ESG) from unclear ESG performance of assets on agents’ optimal portfolios, equilibrium excess returns, and welfare. We consider scenarios involving one or more risky assets with multiple heterogeneous agents in the market. Our results suggest that ESG ambiguity affects the perceptions of ESG-sensitive agents, decreasing demand for green assets, reducing their overall welfare, and increasing equilibrium excess returns. Moreover, risky assets in the green market exhibit lower equilibrium excess returns than in the green-neutral market. Additionally, the equilibrium return of brown assets is significantly higher than that of green assets, and the difference in the ambiguity between the two will further increase this gap. Our findings highlight the importance of establishing a standardized and transparent ESG scoring system to enhance the accuracy of ESG disclosure.

Keywords: ESG ambiguity; Sustainable investment; Asset pricing; Welfare (search for similar items in EconPapers)
JEL-codes: D81 G11 M14 Q56 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323002833

DOI: 10.1016/j.econmod.2023.106471

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