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Responsible investing: Upside potential and downside protection?

Author

Listed:
  • Gao, Yumeng
  • Hoepner, Andreas G.F.
  • Prokopczuk, Marcel
  • Rouxelin, Florent
  • Wuersig, Christoph

Abstract

Conventional risk proxies are measured assuming that investors have symmetric risk preferences, with upside and downside deviations from the expectation being equivalently undesirable. Responsible investors, however, have dual financial aims of enhancing upside potential while reducing downside risk by actively incorporating environmental, social, and governance (ESG) aspects into the investment process. We utilize a non-symmetric option pricing research design to test whether responsible investors could live up to their ambitions. We find that those who are simply Principles for Responsible Investment (PRI) members do not deliver the desirable asymmetric performance, while financial firms with highly rated responsible investment processes can actually achieve both aims for their own shareholders: enhancing upside potentials and protecting themselves from downside risks.

Suggested Citation

  • Gao, Yumeng & Hoepner, Andreas G.F. & Prokopczuk, Marcel & Rouxelin, Florent & Wuersig, Christoph, 2025. "Responsible investing: Upside potential and downside protection?," International Review of Financial Analysis, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:finana:v:97:y:2025:i:c:s1057521924006860
    DOI: 10.1016/j.irfa.2024.103754
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    More about this item

    Keywords

    Responsible investing; ESG opportunity and risk; Option implied volatility; Upside potential; Downside risk; Investing objective; Institutional investor;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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