The Cost of ESG Investing

Socially-responsible investment mandates can cost nothing. Optimal systematic portfolios, using many approaches and rich information in asset characteristics, can be tilted to achieve ESG investing goals with negligible effects on performance. Nonetheless, strategies based on ESG-based mispricing can be profitable if we pool information across ESG information or use specific environmental criteria. Our evidence is inconsistent with ESG measures conveying novel information about systematic risk; but it is consistent with investors placing significant weight on certain ESG subcomponent information, and with ESG-driven mispricing having occurred.

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

JEL Classification: G11, G12

Suggested Citation: Suggested Citation

Lindsey, Laura Anne and Pruitt, Seth and Schiller, Christoph, The Cost of ESG Investing (August 16, 2022). Available at SSRN: https://ssrn.com/abstract=3975077 or http://dx.doi.org/10.2139/ssrn.3975077