Inferring Investor Preferences for Sustainable Investment from Asset Prices

Abstract

This paper documents investors' preferences for ESG investments. Our identification is build on a fairly simple economic mechanism, the sensitivity of debt to equity. We find that while firm CDS spreads co-vary negatively with equity returns, this effect is less pronounced for firms with a high ESG rating. This divergence between equity and CDS spreads for high- vs. low ESG-rated firms suggests that some equity investors have a preference for sustainability that cannot be explained with firm risk.

Keywords: ESG, Sustainable investing, CDS-equity sensitivity

JEL Classification: G11, G12, Q01, Q5