IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v69y2024ipas1544612324011346.html
   My bibliography  Save this article

Evaluating ESG Investment Profitability: From the Perspective of Sophistication in Investment Decision-Making

Author

Listed:
  • Lu, Xiaomeng
  • Zhang, Xianjun
  • Guo, Fusen
  • Li, Feng

Abstract

Environmental, Social, and Governance (ESG) investments are widely discussed in the stock market. Further, the debate on ESG investment profitability has garnered significant scholarly attention. This study examines the relationship between ESG investments and equity investment return (EIR) and whether this relationship is affected by investors' sophistication. The results suggest that while ESG investors generally gain relatively lower profits than others, sophisticated investors, characterized by greater financial knowledge, diversified investments, contrarian investment strategies, and not being influenced by familiar biases, can mitigate these lower returns. These findings enhance our understanding of ESG investments and offer valuable insights to guide investors in making sophisticated ESG investment decisions.

Suggested Citation

  • Lu, Xiaomeng & Zhang, Xianjun & Guo, Fusen & Li, Feng, 2024. "Evaluating ESG Investment Profitability: From the Perspective of Sophistication in Investment Decision-Making," Finance Research Letters, Elsevier, vol. 69(PA).
    • Handle: RePEc:eee:finlet:v:69:y:2024:i:pa:s1544612324011346
    DOI: 10.1016/j.frl.2024.106105
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612324011346
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2024.106105?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lorraine Rupande & Hilary Tinotenda Muguto & Paul-Francois Muzindutsi, 2019. "Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1600233-160, January.
    2. Chen, Tao & Dong, Hui & Lin, Chen, 2020. "Institutional shareholders and corporate social responsibility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 483-504.
    3. Mario La Torre & Fabiomassimo Mango & Arturo Cafaro & Sabrina Leo, 2020. "Does the ESG Index Affect Stock Return? Evidence from the Eurostoxx50," Sustainability, MDPI, vol. 12(16), pages 1-12, August.
    4. Xiaoke Zhang & Xuankai Zhao & Yu He, 2022. "Does It Pay to Be Responsible? The Performance of ESG Investing in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(11), pages 3048-3075, September.
    5. Luigi Guiso & Eliana Viviano, 2015. "How Much Can Financial Literacy Help?," Review of Finance, European Finance Association, vol. 19(4), pages 1347-1382.
    6. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
    7. Shanaev, Savva & Ghimire, Binam, 2022. "When ESG meets AAA: The effect of ESG rating changes on stock returns," Finance Research Letters, Elsevier, vol. 46(PA).
    8. Arno Riedl & Paul Smeets, 2017. "Why Do Investors Hold Socially Responsible Mutual Funds?," Journal of Finance, American Finance Association, vol. 72(6), pages 2505-2550, December.
    9. Rajna Gibson Brandon & Philipp Krueger & Peter Steffen Schmidt, 2021. "ESG Rating Disagreement and Stock Returns," Financial Analysts Journal, Taylor & Francis Journals, vol. 77(4), pages 104-127, October.
    10. Francesco Cesarone & Manuel Luis Martino & Alessandra Carleo, 2022. "Does ESG Impact Really Enhance Portfolio Profitability?," Sustainability, MDPI, vol. 14(4), pages 1-28, February.
    11. Luo, Di, 2022. "ESG, liquidity, and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    12. Li, Jianjun & Li, Qize & Wei, Xu, 2020. "Financial literacy, household portfolio choice and investment return," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    13. Mark Grinblatt & Matti Keloharju, 2001. "What Makes Investors Trade?," Journal of Finance, American Finance Association, vol. 56(2), pages 589-616, April.
    14. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    15. Nils Engelhardt & Jens Ekkenga & Peter Posch, 2021. "ESG Ratings and Stock Performance during the COVID-19 Crisis," Sustainability, MDPI, vol. 13(13), pages 1-15, June.
    16. Arvid O. I. Hoffmann & Thomas Post & Joost M. E. Pennings, 2015. "How Investor Perceptions Drive Actual Trading and Risk-Taking Behavior," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 16(1), pages 94-103, January.
    17. Pengjie Gao & Allen Hu & Peter Kelly & Cameron Peng & Ning Zhu, 2024. "Asset Complexity and the Return Gap," Review of Finance, European Finance Association, vol. 28(2), pages 511-550.
    18. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    19. Florian Berg & Julian F. Koelbel & Anna Pavlova & Roberto Rigobon, 2022. "ESG Confusion and Stock Returns: Tackling the Problem of Noise," NBER Working Papers 30562, National Bureau of Economic Research, Inc.
    20. George M Korniotis & Alok Kumar, 2011. "Do Older Investors Make Better Investment Decisions?," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 244-265, February.
    21. repec:bla:jfinan:v:53:y:1998:i:5:p:1775-1798 is not listed on IDEAS
    22. Li, Jiaman & Dong, Kangyin & Taghizadeh-Hesary, Farhad & Wang, Kun, 2022. "3G in China: How green economic growth and green finance promote green energy?," Renewable Energy, Elsevier, vol. 200(C), pages 1327-1337.
    23. Mark Grinblatt & Matti Keloharju, 2000. "What Makes Investors Trade?," Yale School of Management Working Papers ysm146, Yale School of Management, revised 01 Nov 2001.
    24. Díaz, Antonio & Esparcia, Carlos & López, Raquel, 2022. "The diversifying role of socially responsible investments during the COVID-19 crisis: A risk management and portfolio performance analysis," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 39-60.
    25. Mozaffar Khan, 2019. "Corporate Governance, ESG, and Stock Returns around the World," Financial Analysts Journal, Taylor & Francis Journals, vol. 75(4), pages 103-123, October.
    26. Fama, Eugene F. & French, Kenneth R., 2007. "Disagreement, tastes, and asset prices," Journal of Financial Economics, Elsevier, vol. 83(3), pages 667-689, March.
    27. Feng, Jingwen & Goodell, John W. & Shen, Dehua, 2022. "ESG rating and stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 46(PB).
    28. Stefano Giglio & Matteo Maggiori & Johannes Stroebel & Stephen Utkus, 2021. "Five Facts about Beliefs and Portfolios," American Economic Review, American Economic Association, vol. 111(5), pages 1481-1522, May.
    29. Nektarios Gavrilakis & Christos Floros, 2023. "ESG performance, herding behavior and stock market returns: evidence from Europe," Operational Research, Springer, vol. 23(1), pages 1-21, March.
    30. Broadstock, David C. & Chan, Kalok & Cheng, Louis T.W. & Wang, Xiaowei, 2021. "The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China," Finance Research Letters, Elsevier, vol. 38(C).
    31. de Haan, Leo & Kakes, Jan, 2011. "Momentum or contrarian investment strategies: Evidence from Dutch institutional investors," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2245-2251, September.
    32. Pedersen, Lasse Heje & Fitzgibbons, Shaun & Pomorski, Lukasz, 2021. "Responsible investing: The ESG-efficient frontier," Journal of Financial Economics, Elsevier, vol. 142(2), pages 572-597.
    33. Baker, Edward D. & Boulton, Thomas J. & Braga-Alves, Marcus V. & Morey, Matthew R., 2021. "ESG government risk and international IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 67(C).
    34. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
    35. Luigi Aldieri & Alessandra Amendola & Vincenzo Candila, 2023. "The Impact of ESG Scores on Risk Market Performance," Sustainability, MDPI, vol. 15(9), pages 1-16, April.
    36. Chen, Chun-Da & Su, Ching-Hui (Joan) & Chen, Ming-Hsiang, 2022. "Understanding how ESG-focused airlines reduce the impact of the COVID-19 pandemic on stock returns," Journal of Air Transport Management, Elsevier, vol. 102(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Zhang-Hangjian & Kang, JingWen & Koedijk, Kees G. & Gao, Xiang & Gu, ZhenHua, 2024. "Short-term market reactions to ESG ratings disclosures: An event study in the Chinese stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 43(C).
    2. Roman Kräussl & Tobi Oladiran & Denitsa Stefanova, 2024. "A review on ESG investing: Investors’ expectations, beliefs and perceptions," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 476-502, April.
    3. Wang, Ren & Bian, Yuxiang & Xiong, Xiong, 2024. "Impact of ESG preferences on investments and emissions in a DSGE framework," Economic Modelling, Elsevier, vol. 135(C).
    4. Wu, Yanran & Zhou, Riwang & Zhang, Chao, 2024. "Size and ESG premiums: Evidence from Chinese A-share market," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    5. Ren, Xiaohang & Zeng, Gudian & Zhao, Yang, 2023. "Digital finance and corporate ESG performance: Empirical evidence from listed companies in China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    6. Catherine D’hondt & Maxime Merli & Tristan Roger, 2021. "What drives retail portfolio exposure to ESG factors?," Post-Print hal-03373287, HAL.
    7. Gong, Xiaomin & Xie, Fei & Zhou, Zhongsheng & Zhang, Chenyang, 2024. "The enhanced benefits of ESG in portfolios: A multi-factor model perspective based on LightGBM," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    8. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    9. D’Hondt, Catherine & De Winne, Rudy & Merli, Maxime, 2021. "Do retail investors bite off more than they can chew? A close look at their return objectives," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 879-902.
    10. Teti, Emanuele & Dallocchio, Maurizio & L'Erario, Giulio, 2023. "The impact of ESG tilting on the performance of stock portfolios in times of crisis," Finance Research Letters, Elsevier, vol. 52(C).
    11. Lestari, Jenjang Sri & Frömmel, Michael, 2024. "Socially responsible investments: doing good while doing well in developed versus emerging markets?," Research in International Business and Finance, Elsevier, vol. 69(C).
    12. D’Hondt, Catherine & Merli, Maxime & Roger, Tristan, 2022. "What drives retail portfolio exposure to ESG factors?," Finance Research Letters, Elsevier, vol. 46(PB).
    13. Ling, Aifan & Li, Jinlong & Zhang, Yugui, 2023. "Can firms with higher ESG ratings bear higher bank systemic tail risk spillover?—Evidence from Chinese A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    14. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    15. Phan, Thuy Chung & Rieger, Marc Oliver & Wang, Mei, 2018. "What leads to overtrading and under-diversification? Survey evidence from retail investors in an emerging market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 19(C), pages 39-55.
    16. Famulok, Jakob & Kormanyos, Emily & Worring, Daniel, 2024. "Do investors use sustainable assets as carbon offsets?," SAFE Working Paper Series 431, Leibniz Institute for Financial Research SAFE.
    17. Guo, Kun & Li, Yichong & Zhang, Yunhan & Chen, Yingtong & Ma, Yanran, 2024. "Cross-country risk spillovers of ESG stock indices: Dynamic patterns and the role of climate transition risks," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    18. Junjun Ma & Xindan Li & Lei Lu & Weixing Wu & Xiong Xiong, 2022. "Individual investors' dispersion in beliefs and stock returns," Financial Management, Financial Management Association International, vol. 51(3), pages 929-953, September.
    19. Liu, Xufeng & Wan, Die, 2023. "Retail investor trading and ESG pricing in China," Research in International Business and Finance, Elsevier, vol. 65(C).
    20. Luo, Di, 2022. "ESG, liquidity, and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).

    More about this item

    Keywords

    ESG investment; Investor sophistication; Equity investment return;
    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
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:69:y:2024:i:pa:s1544612324011346. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.