Sustainable Retail Investing: Motivations, Portfolio Consequences and the Role of ESG Ratings

Abstract

This study examines examines whether, how and to what effect wealthy retail investors use sustainability information in their investment decisions. Using a proprietary dataset of investment holdings of wealthy European retail investors, we exploit a quasi-exogenous shock to the coverage of sustainability ratings available to investors and document a plausibly causal effect of these ratings on investment allocations. We find the preference for assets with high sustainability ratings to stem from non-pecuniary motives and that sustainability is not perceived as a luxury good. We further find that "ESG-minded" investors hold significantly concentrated and under-diversified portfolios, over-allocate to home stocks and hold on longer to unrealised losses than "ESG-agnostic" investors. The former seem to achieve their objectives of investing in more sustainable firms that have fewer social and governance incidents but also overweight carbon-intensive sectors.

Keywords: Sustainable investing, retail investors, ESG ratings, wealthy households, investor behaviour, portfolio characteristics

JEL Classification: G11, G14, G15, G29, G41, G50