The Cost of ESG Investing
46 Pages Posted: 6 Dec 2021
Date Written: November 30, 2021
Even against increasing interest in socially responsible investing mandates, we find that implementing ESG strategies can cost nothing. Modifying optimal portfolio weights to achieve an ESG-investing tilt negligibly affects portfolio performance across a broad range of ESG measures and thresholds. This is because those ESG measures do not provide information about future stock performance, either in relation to risk or mispricing, beyond what is provided by other observable firm characteristics. That the stock market does not reflect significant equilibrium pricing of ESG information is rationalized in a model of responsible investing wherein investors differ in which ESG-related criteria are used to weight their portfolios.
Keywords: ESG, IPCA, tangency portfolio, portfolio tilt, responsible investing, sus- tainable investing
JEL Classification: G11, G12
Suggested Citation: Suggested Citation