The Cost of ESG Investing
78 Pages Posted: 6 Dec 2021 Last revised: 16 Aug 2022
Date Written: August 16, 2022
Abstract
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