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

Itay Goldstein, Alexandr Kopytov, Lin Shen and Haotian Xiang

No 29839, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how environmental, social and governance (ESG) investing reshapes information aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG risks but have different preferences over them. Because of the preference heterogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about the financial payoff and raise the cost of capital.

JEL-codes: G14 G32 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-env, nep-fdg and nep-fmk
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