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Sustainable investment under ESG volatility and ambiguity

Author

Listed:
  • Luo, Deqing
  • Shan, Xun
  • Yan, Jingzhou
  • Yan, Qianhui

Abstract

This paper investigates the impacts of ambiguity regarding environmental, social, and governance (ESG) from unclear ESG performance of assets on agents’ optimal portfolios, equilibrium excess returns, and welfare. We consider scenarios involving one or more risky assets with multiple heterogeneous agents in the market. Our results suggest that ESG ambiguity affects the perceptions of ESG-sensitive agents, decreasing demand for green assets, reducing their overall welfare, and increasing equilibrium excess returns. Moreover, risky assets in the green market exhibit lower equilibrium excess returns than in the green-neutral market. Additionally, the equilibrium return of brown assets is significantly higher than that of green assets, and the difference in the ambiguity between the two will further increase this gap. Our findings highlight the importance of establishing a standardized and transparent ESG scoring system to enhance the accuracy of ESG disclosure.

Suggested Citation

  • Luo, Deqing & Shan, Xun & Yan, Jingzhou & Yan, Qianhui, 2023. "Sustainable investment under ESG volatility and ambiguity," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323002833
    DOI: 10.1016/j.econmod.2023.106471
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    ESG ambiguity; Sustainable investment; Asset pricing; Welfare;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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