Skills and Sentiment in Sustainable Investing
100 Pages Posted: 2 Mar 2020 Last revised: 8 Aug 2022
Date Written: February 1, 2020
We document a significant difference in the returns of sustainable investing across investor types. Investors with strict ESG mandates earn 3.1% less than flexible investors. The mechanism is that flexible investors are able to react on expected ESG improvements. They buy stocks that subsequently experience ESG score increases. After ESG improvements have realized, demand from strict mandate investors pushes up stock prices, resulting in positive returns for flexible investors. These returns are higher when accompanied by rising climate sentiment, as seen during the 2010s. Our channel accounts for 51% of the return difference between strict and flexible ESG investment mandates.
Keywords: ESG, Heterogenous Investors, Revealed Preferences, Text Data, Sustainable Finance, Responsible Investing
JEL Classification: G11, G12, G14, Q5
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