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ESG asset demand with information costs

Author

Listed:
  • Elisa Luciano
  • Antonella Tolomeo

Abstract

We study a market with non-iid returns linked to an ESG (Environmental, Social and Governance) and a market factor. Motivated by empirical evidence, we assume that the investor does not know which part of the return is due to the ESG component, unless he pays a cost. We provide conditions on the persistence, risk premium and observability of the ESG factor, relative to the market one, to invest in ESG assets. Information should be acquired when its costs are below a threshold that we find explicitly. We calibrate the model to the German twin bonds, separate the ESG from the market risk factor, compute their risk premia and simulate optimal asset allocation.

Suggested Citation

  • Elisa Luciano & Antonella Tolomeo, 2024. "ESG asset demand with information costs," Carlo Alberto Notebooks 724 JEL Classification: G, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:724
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