Sustainable investing with ESG rating uncertainty

Doron Avramov, Si Cheng, Abraham Lioui and Andrea Tarelli

Journal of Financial Economics, 2022, vol. 145, issue 2, 642-664

Abstract: 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.

Keywords: ESG; Rating uncertainty; Portfolio choice; Capital asset pricing model (search for similar items in EconPapers)
JEL-codes: G11 G12 G24 M14 Q01 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (168)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X21003974
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:2:p:642-664

DOI: 10.1016/j.jfineco.2021.09.009

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().