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ESG asset demand with information costs

Author

Listed:
  • Elisa Luciano

    (University of Torino)

  • Antonella Tolomeo

    (Gruppo Reale)

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. The approach is consistent with risk premia on green assets greater or lower than the ones on market-only related assets. We provide conditions on the persistence, weight and estimation error in the ESG factor, to optimally invest in ESG-assets. By calibrating the model to the German twin Govies 2020–2024, we separate the ESG from the market risk factor and provide conditions for the greenium to be negative. We show that it is rational to invest in green bonds if information costs are below 0.07 bps per day, to abstain if they are greater. Investing in the green German bond without getting informed is always suboptimal.

Suggested Citation

  • Elisa Luciano & Antonella Tolomeo, 2025. "ESG asset demand with information costs," Annals of Finance, Springer, vol. 21(2), pages 189-209, June.
    • Handle: RePEc:kap:annfin:v:21:y:2025:i:2:d:10.1007_s10436-025-00462-z
    DOI: 10.1007/s10436-025-00462-z
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    1. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    2. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
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    4. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2022. "Dissecting green returns," Journal of Financial Economics, Elsevier, vol. 146(2), pages 403-424.
    5. 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.
    6. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
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