Preferences and Skill in Sustainable Investing

59 Pages Posted: 2 Mar 2020 Last revised: 18 Mar 2020

See all articles by Andreas Brøgger

Andreas Brøgger

Copenhagen Business School

Alexander Kronies

Copenhagen Business School

Date Written: February 1, 2020

Abstract

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

Suggested Citation

Brøgger, Andreas Christian Svane and Kronies, Alexander, Preferences and Skill in Sustainable Investing (February 1, 2020). Available at SSRN: https://ssrn.com/abstract=3531312

Andreas Christian Svane Brøgger (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg, Frederiksberg 2000

Alexander Kronies

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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