IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v128y2023ics0264999323002833.html
   My bibliography  Save this article

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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999323002833
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2023.106471?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. Back, Kerry, 2010. "Asset Pricing and Portfolio Choice Theory," OUP Catalogue, Oxford University Press, number 9780195380613, Decembrie.
    2. Adem Atmaz & Suleyman Basak, 2018. "Belief Dispersion in the Stock Market," Journal of Finance, American Finance Association, vol. 73(3), pages 1225-1279, June.
    3. Ling, Aifan & Li, Junxue & Wen, Limin & Zhang, Yi, 2023. "When trackers are aware of ESG: Do ESG ratings matter to tracking error portfolio performance?," Economic Modelling, Elsevier, vol. 125(C).
    4. Monica Billio & Michele Costola & Iva Hristova & Carmelo Latino & Loriana Pelizzon, 2021. "Inside the ESG ratings: (Dis)agreement and performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(5), pages 1426-1445, September.
    5. Ameur, H. Ben & Prigent, J.L., 2013. "Optimal portfolio positioning under ambiguity," Economic Modelling, Elsevier, vol. 34(C), pages 89-97.
    6. H. Henry Cao & Tan Wang & Harold H. Zhang, 2005. "Model Uncertainty, Limited Market Participation, and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1219-1251.
    7. Luo, Deqing & Wu, Xiaoping & Xu, Jiawen & Yan, Jingzhou, 2022. "Robust leverage decision under locked wealth and high-water mark contract," Finance Research Letters, Elsevier, vol. 46(PB).
    8. Nengjiu Ju & Jianjun Miao, 2012. "Ambiguity, Learning, and Asset Returns," Econometrica, Econometric Society, vol. 80(2), pages 559-591, March.
    9. Li, Xuepeng & Xu, Fengmin & Jing, Kui, 2022. "Robust enhanced indexation with ESG: An empirical study in the Chinese Stock Market," Economic Modelling, Elsevier, vol. 107(C).
    10. Congming Mu & Jingzhou Yan & Jinqiang Yang, 2023. "Robust risk choice under high-water mark contract," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 295-322, July.
    11. Jianjun Miao, 2004. "A Note on Consumption and Savings under Knightian Uncertainty," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 299-311, November.
    12. 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.
    13. Avramov, Doron & Cheng, Si & Lioui, Abraham & Tarelli, Andrea, 2022. "Sustainable investing with ESG rating uncertainty," Journal of Financial Economics, Elsevier, vol. 145(2), pages 642-664.
    14. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2022. "Dissecting green returns," Journal of Financial Economics, Elsevier, vol. 146(2), pages 403-424.
    15. Guidolin, Massimo & Liu, Hening, 2016. "Ambiguity Aversion and Underdiversification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(4), pages 1297-1323, August.
    16. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 41-81, January.
    17. Epstein, Larry G. & Miao, Jianjun, 2003. "A two-person dynamic equilibrium under ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 27(7), pages 1253-1288, May.
    18. Mohammad R. Jahan-Parvar & Hening Liu, 2014. "Ambiguity Aversion and Asset Prices in Production Economies," Review of Financial Studies, Society for Financial Studies, vol. 27(10), pages 3060-3097.
    19. , & ,, 2011. "Intertemporal substitution and recursive smooth ambiguity preferences," Theoretical Economics, Econometric Society, vol. 6(3), September.
    20. Lars Peter Hansen & Jianjun Miao, 2022. "Asset pricing under smooth ambiguity in continuous time," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(2), pages 335-371, September.
    21. Florian Berg & Julian F Kölbel & Roberto Rigobon, 2022. "Aggregate Confusion: The Divergence of ESG Ratings [Corporate social responsibility and firm risk: theory and empirical evidence]," Review of Finance, European Finance Association, vol. 26(6), pages 1315-1344.
    22. 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.
    23. Li, Tongtong & Wang, Shibo & Yang, Jinqiang, 2021. "Robust consumption and portfolio choices with habit formation," Economic Modelling, Elsevier, vol. 98(C), pages 227-246.
    24. Aaron K. Chatterji & Rodolphe Durand & David I. Levine & Samuel Touboul, 2016. "Do ratings of firms converge? Implications for managers, investors and strategy researchers," Strategic Management Journal, Wiley Blackwell, vol. 37(8), pages 1597-1614, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zou, Jin & Yan, Jingzhou & Deng, Guoying, 2023. "ESG rating confusion and bond spreads," Economic Modelling, Elsevier, vol. 129(C).

    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. Zou, Jin & Yan, Jingzhou & Deng, Guoying, 2023. "ESG rating confusion and bond spreads," Economic Modelling, Elsevier, vol. 129(C).
    2. Nengjiu Ju & Jianjun Miao, 2012. "Ambiguity, Learning, and Asset Returns," Econometrica, Econometric Society, vol. 80(2), pages 559-591, March.
    3. Phelim Boyle & Lorenzo Garlappi & Raman Uppal & Tan Wang, 2012. "Keynes Meets Markowitz: The Trade-Off Between Familiarity and Diversification," Management Science, INFORMS, vol. 58(2), pages 253-272, February.
    4. repec:esx:essedp:770 is not listed on IDEAS
    5. Hui Chen & Nengjiu Ju & Jianjun Miao, 2014. "Dynamic Asset Allocation with Ambiguous Return Predictability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 799-823, October.
    6. Bin Wei, 2021. "Ambiguity, Long-Run Risks, and Asset Prices," FRB Atlanta Working Paper 2021-21, Federal Reserve Bank of Atlanta.
    7. Chiaki Hara & Toshiki Honda, 2022. "Implied Ambiguity: Mean-Variance Inefficiency and Pricing Errors," Management Science, INFORMS, vol. 68(6), pages 4246-4260, June.
    8. Illeditsch, PK & Ganguli, J & Condie, S, 2015. "Information Inertia," Economics Discussion Papers 15615, University of Essex, Department of Economics.
    9. Ferriani, Fabrizio, 2023. "Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?," International Review of Financial Analysis, Elsevier, vol. 88(C).
    10. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
    11. Chiaki Hara & Toshiki Honda, 2016. "Mutual Fund Theorem for Ambiguity-Averse Investors and the Optimality of the Market Portfolio," KIER Working Papers 943, Kyoto University, Institute of Economic Research.
    12. Zhao, Guihai, 2017. "Confidence, bond risks, and equity returns," Journal of Financial Economics, Elsevier, vol. 126(3), pages 668-688.
    13. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
    14. Dimmock, Stephen G. & Kouwenberg, Roy & Mitchell, Olivia S. & Peijnenburg, Kim, 2016. "Ambiguity aversion and household portfolio choice puzzles: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 119(3), pages 559-577.
    15. Dunbar, Kwamie & Treku, Daniel & Sarnie, Robert & Hoover, Jack, 2023. "What does ESG risk premia tell us about mutual fund sustainability levels: A difference-in-differences analysis," Finance Research Letters, Elsevier, vol. 57(C).
    16. Jianjun Miao & Bin Wei & Hao Zhou, 2019. "Ambiguity Aversion and the Variance Premium," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-36, June.
    17. A. Ronald Gallant & Mohammad Jahan-Parvar & Hening Liu, 2015. "Measuring Ambiguity Aversion," Finance and Economics Discussion Series 2015-105, Board of Governors of the Federal Reserve System (U.S.).
    18. Ganguli, J & Condie, S & Illeditsch, PK, 2012. "Information Inertia," Economics Discussion Papers 5628, University of Essex, Department of Economics.
    19. repec:esx:essedp:719 is not listed on IDEAS
    20. Yu, Haixu & Liang, Chuanyu & Liu, Zhaohua & Wang, He, 2023. "News-based ESG sentiment and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 88(C).
    21. Backus, David & Ferriere, Axelle & Zin, Stanley, 2015. "Risk and ambiguity in models of business cycles," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 42-63.
    22. Corgnet, Brice & Hernán-González, Roberto & Kujal, Praveen, 2020. "On booms that never bust: Ambiguity in experimental asset markets with bubbles," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).

    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

    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:ecmode:v:128:y:2023:i:c:s0264999323002833. 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/inca/30411 .

    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.