IDEAS home Printed from https://ideas.repec.org/p/cca/wpaper/724.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: https://www.carloalberto.org/wp-content/uploads/2024/10/no.724.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    3. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2022. "Dissecting green returns," Journal of Financial Economics, Elsevier, vol. 146(2), pages 403-424.
    4. 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.
    5. 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.
    6. Edmans, Alex, 2011. "Does the stock market fully value intangibles? Employee satisfaction and equity prices," Journal of Financial Economics, Elsevier, vol. 101(3), pages 621-640, September.
    Full references (including those not matched with items on IDEAS)

    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. Lars Hornuf & Gül Yüksel, 2022. "The Performance of Socially Responsible Investments: A Meta-Analysis," CESifo Working Paper Series 9724, CESifo.
    2. Alves, Rómulo & Krüger, Philipp & van Dijk, Mathijs, 2025. "Drawing up the bill: Are ESG ratings related to stock returns around the world?," Journal of Corporate Finance, Elsevier, vol. 93(C).
    3. 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.
    4. Zhou, Zihan & Wang, Shaolin & Wang, Hongxia, 2025. "The performance of ESG portfolios: A stochastic dominance approach," Finance Research Letters, Elsevier, vol. 72(C).
    5. Roman Kräussl & Tobi Oladiran & Denitsa Stefanova, 2024. "A review on ESG investing: Investors’ expectations, beliefs and perceptions," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 476-502, April.
    6. Fan, Kwok Yuen & Shen, Jianfu & Hui, Eddie C.M. & Cheng, Louis T.W., 2024. "ESG components and equity returns: Evidence from real estate investment trusts," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    7. Chi Zhang & Xinyang Li & Andrea Tamoni & Misha Beek & Andrew Ang, 2024. "ESG risk and returns implied by demand-based asset pricing models," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 203-221, May.
    8. Staněk Gyönyör, Lucie & Horváth, Matúš & Stašek, Daniel & Stachoň, Martin, 2025. "The role of ESG factor in stock clustering based on risk-return-liquidity dimensions," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    9. Vu, Thanh Nam & Lehkonen, Heikki & Junttila, Juha-Pekka & Lucey, Brian, 2025. "ESG investment performance and global attention to sustainability," The North American Journal of Economics and Finance, Elsevier, vol. 75(PA).
    10. Chava, Sudheer & Kim, Jeong Ho (John) & Lee, Jaemin, 2025. "Risk, return, and environmental and social ratings," Journal of Corporate Finance, Elsevier, vol. 92(C).
    11. 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).
    12. Ho, Thang, 2022. "Climate change news sensitivity and mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 83(C).
    13. Aydin Aslan & Peter N. Posch, 2022. "How Do Investors Value Sustainability? A Utility-Based Preference Optimization," Sustainability, MDPI, vol. 14(23), pages 1-15, November.
    14. Ciciretti, Rocco & Dalò, Ambrogio & Dam, Lammertjan, 2023. "The contributions of betas versus characteristics to the ESG premium," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 104-124.
    15. Li, Qianqian & Watts, Edward M. & Zhu, Christina, 2024. "Retail investors and ESG news," Journal of Accounting and Economics, Elsevier, vol. 78(2).
    16. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    17. Muck, Matthias & Schmidl, Thomas, 2024. "Comparing ESG score weighting approaches and stock performance differentiation," Finance Research Letters, Elsevier, vol. 67(PB).
    18. Ilaria Piatti & Joel Shapiro & Xuan Wang, 2023. "Sustainable Investing and Public Goods Provision," Working Papers 969, Queen Mary University of London, School of Economics and Finance.
    19. Lioui, Abraham & Tarelli, Andrea, 2022. "Chasing the ESG factor," Journal of Banking & Finance, Elsevier, vol. 139(C).
    20. Ferriani, Fabrizio, 2023. "Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?," International Review of Financial Analysis, Elsevier, vol. 88(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    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:cca:wpaper:724. 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: Giovanni Bert (email available below). General contact details of provider: https://edirc.repec.org/data/fccaait.html .

    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.