Unpackaging ESG: Evidence from 401(k) Investment

Abstract

We study how investors respond to scandals related to three distinct aspects of ESG--E(nvironmental), S(ocial) and G(overnance)--in their retirement savings. Using data on 401(k) investments, we show that nearby ESG scandals correlate with increased ESG fund additions and flows, possibly through ``evoking'' their existing sustainable preferences. Investors with different characteristics respond heterogeneously to E, S and G scandals. In magnitude, old investors are twice as likely as young investors to add ESG funds to their portfolios after the shock of social scandals. In specific scandals, low-income investors care about human rights, while only young and rich investors care about environmental issues. Investors also have clear leanings on ESG funds, resulting in an overweighting of funds with higher environmental and social scores and a lack of attention to governance elements. Overall, our results suggest the need to incorporate distinct E, S, and G concerns into heterogeneous preference models.

Keywords: ESG Investment, Sustainable Investment, Heterogenous Preference, 401(k) Plan

JEL Classification: D91, G11, G50, J32, Q50