ESG Preferences, Risk and Return

18 Pages Posted: 19 Oct 2020 Last revised: 4 Nov 2020

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Date Written: August 30, 2020

Abstract

There are two primary factors that can affect expected returns for ESG companies with high ratings – investor preferences and risk. While it is true that investor preferences for highly rated ESG companies can lower the cost of capital and, thereby, increase the value of those companies, the flip side of the coin is lower expected returns for investors. With respect to risk, the jury remains out on whether there is an ESG related risk factor. However, early research indicates that if there is an ESG related risk factor, it also points toward lower expected returns for investments in highly rated ESG companies because those companies provide a hedge against ESG related risk. The conclusion is that while ESG investing may have social benefits, higher expected returns for investors is not among them.

Keywords: ESG preferences, risk, return

JEL Classification: G00, G10, G12

Suggested Citation

Cornell, Bradford, ESG Preferences, Risk and Return (August 30, 2020). Available at SSRN: https://ssrn.com/abstract=3683390 or http://dx.doi.org/10.2139/ssrn.3683390

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

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