Preferences and Skill in Sustainable Investing
59 Pages Posted: 2 Mar 2020 Last revised: 18 Mar 2020
Date Written: February 1, 2020
We document a positive Environmental Social Governance (ESG) premium amongst stocks with high socially unconstrained ownership. And, importantly, the premium evaporates amongst stocks with high socially constrained ownership. In fact, we find that constrained investors chase high ESG stocks with high abnormal returns. Once purchased, however, abnormal returns vanish. The returns do not seem to be driven by consumption risk, as they are especially high during the financial crisis. Instead, they are explained by two facts that we further uncover. First, constrained investors have higher sustainability preferences than unconstrained, which is revealed through their ESG tilt. This yields a sustainability premium. Secondly, unconstrained investors are skilled investors who research firms and are able to predict their future ESG scores, which they trade on. This earns them an abnormal return due to the sustainability premium. They are able to exploit this especially during periods of high Climate sentiment and in times of crisis.
Keywords: Heterogenous investors, Revealed preferences, ESG, Sentiment, Text data
JEL Classification: G11, G12, G14, Q5
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