On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices

Abstract

We study how ESG investing reshapes information aggregation by prices. We document that the information content of asset prices changes with ESG investing. We then develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG performances of a firm but have different preferences about them. Two investor groups trade in opposite directions based on the same information, resulting in a potential multiplicity of equilibrium price. The growth of green investors and an improvement in ESG information quality can reduce price informativeness about a firm's financial performance and raise its cost of capital.

Keywords: ESG investing, heterogeneous preferences, price informativeness

JEL Classification: G12, G14