Corporate ESG Profiles and Investor Horizons

Abstract

Questions and debate surround institutional investor preferences regarding the Environmental, Social and Governance (ESG) profiles of their portfolio firms. To address these issues, we examine changes in their portfolios and find that preferences for corporate ESG depend critically on investor horizons: Investors with longer horizons tend to prefer higher-ESG firms, while short-term investors prefer the opposite. Consistent with the importance of horizon, we find that investors behave more patiently toward high ESG firms, selling less after negative earnings surprises or poor stock returns. We further support these findings using changes in the FTSE4Good Index as shocks to firms' ESG reputations.

Keywords: Corporate ESG, Investor Horizons, Corporate Short-Termism

JEL Classification: G34, G23, G00