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Option traders are concerned about climate risks: ESG ratings and short-term sentiment

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  • Ford, Jansson M.
  • Gehricke, Sebastian A.
  • Zhang, Jin E.

Abstract

This paper examines the potential relationship between ESG factors and short-term investor sentiment derived from option markets. We test whether ESG factors are related to short-term investor sentiment for US companies, using portfolio sorts and dynamic panel regressions. The results reveal firstly, that the difference between the highest and lowest ESG, ‘E’, ‘S’, and ‘G’ rated portfolios is negative and significant, showing that those firms in the highest ESG rated portfolio are receiving significantly more optimistic sentiment than those in the lowest portfolio. Secondly, we show that only the ‘E’ score and ESG controversies score are significant factors in option traders’ sentiment in our multivariate setting, with better scores in these factors significantly improving sentiment. These results persist within a sector analysis, in the materials, consumer discretionary, communications, utilities, and real estate sectors. This paper shows that the most sophisticated investors (options traders) are considering environmental risks of individual companies.

Suggested Citation

  • Ford, Jansson M. & Gehricke, Sebastian A. & Zhang, Jin E., 2022. "Option traders are concerned about climate risks: ESG ratings and short-term sentiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    • Handle: RePEc:eee:beexfi:v:35:y:2022:i:c:s2214635022000363
    DOI: 10.1016/j.jbef.2022.100687
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    References listed on IDEAS

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    Cited by:

    1. Dhasmana, Samriddhi & Ghosh, Sajal & Kanjilal, Kakali, 2023. "Does investor sentiment influence ESG stock performance? Evidence from India," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    2. Santi, Caterina, 2023. "Investor climate sentiment and financial markets," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. Zanin, Luca, 2023. "A flexible estimation of sectoral portfolio exposure to climate transition risks in the European stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).

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    More about this item

    Keywords

    ESG; CSR; Sentiment; Put–call ratio; Climate risks;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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