On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices

81 Pages Posted: 11 Apr 2022 Last revised: 14 Jul 2023

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ; National Bureau of Economic Research (NBER)

Alexandr Kopytov

University of Rochester - Simon Business School

Lin Shen

INSEAD

Haotian Xiang

Peking University - Guanghua School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 2022

Abstract

We study how environmental, social and governance (ESG) investing reshapes information aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG risks but have different preferences over them. Because of the preference heterogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about the financial payoff and raise the cost of capital.

Suggested Citation

Goldstein, Itay and Kopytov, Alexandr and Shen, Lin and Xiang, Haotian, On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices (April 2022). NBER Working Paper No. w29839, Available at SSRN: https://ssrn.com/abstract=4080653

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER) ( email )

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Alexandr Kopytov

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Lin Shen

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Haotian Xiang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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