The Cost of ESG Investing

55 Pages Posted: 6 Dec 2021 Last revised: 11 Jul 2023

See all articles by Laura Anne Lindsey

Laura Anne Lindsey

Arizona State University (ASU) - Finance Department

Seth Pruitt

Arizona State University (ASU) - Finance Department

Christoph Schiller

Arizona State University (ASU) - W.P. Carey School of Business

Date Written: July 5, 2023

Abstract

Using Instrumented Principal Component Analysis (IPCA), we document that socially-responsible investment mandates can cost nothing. However, the implementation of ESG-portfolios matters: we find negligible performance effects when tilting an IPCA-implied optimal portfolio to fit typical ESG mandates, but observe larger performance drops implementing responsible-investor models that achieve similar ESG-performance. When we embed ESG-scores in the IPCA-model, they do not (yet) provide novel information about systematic risk, and no individual ESG-score defines a meaningful ESG-factor. However, jointly using environmental information reveals an E-specific factor for which price has increased over the past decade, consistent with an ESG-disagreement mechanism we describe.

Keywords: ESG, IPCA, tangency portfolio, portfolio tilt, responsible investing, sustainable investing

JEL Classification: G11, G12

Suggested Citation

Lindsey, Laura Anne and Pruitt, Seth and Schiller, Christoph, The Cost of ESG Investing (July 5, 2023). Available at SSRN: https://ssrn.com/abstract=3975077 or http://dx.doi.org/10.2139/ssrn.3975077

Laura Anne Lindsey

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Seth Pruitt (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Christoph Schiller

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2,808
Abstract Views
8,901
Rank
8,893
PlumX Metrics