The ESG Home Bias

Abstract

In a sample of 7,209 environmental, social, and governance (ESG) incidents involving 63 incident countries and more than 6,000 firms, we show that abnormal event returns are negative (-0.6%) on average but less so when incidents occur abroad rather than at home. This domestic-foreign return gap is less pronounced when incidents are caused by firms (i) with a large shareholder base from the incident country or (ii) headquartered in more environmentally friendly countries. The gap is accentuated when culprits are headquartered in more patriotic countries. Taken together, our results suggest that shareholder preferences for ESG externalities are not universal but characterized by home bias.

Keywords: environmental and social investing, home bias, proximity bias, law and finance, investor disagreement

JEL Classification: F23, F64, G14,M14