Do ESG Investors care about carbon emissions? Evidence from securitized auto loans
54 Pages Posted: 14 Feb 2023 Last revised: 27 Nov 2023
Date Written: September 27, 2022
Securitized auto loans present a clean empirical setting for studying the effects of ESG investing on asset prices and quantities. I show that auto ABS of issuers with high ESG scores have 10% lower issuance spreads. The observed differences in spreads imply that investors derive ESG convenience yields of 0.28% per annum, on average. This convenience yield nearly tripled from 0.14% in 2017 to 0.39% in 2022. However, I show that the focus on issuer ESG scores instead of CO2 emission also lowers the cost of capital for high-emission auto ABS by 6%, which is likely driven by the fact that commonly used ESG scores are positively correlated with the CO2 emission of collateral pools. I further document that ESG mutual funds hold positions across the full distribution of CO2 emissions and invest more in auto ABS whose issuers have higher ESG scores, even if those securities have a higher CO2 emission intensity. These findings raise questions about the effectiveness of ESG investment strategies in addressing environmental externalities.
Keywords: Auto ABS, Climate Change, Climate Finance, Corporate Social Responsibility, Environment, ESG, Green bonds, Greenium, Sustainable investing, Responsible Investing, SRI, CSR
JEL Classification: G12, G18, G20, G41, Q56
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