IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/24063.html
   My bibliography  Save this paper

Environmental, Social, and Governance Criteria: Why Investors are Paying Attention

Author

Listed:
  • Ravi Jagannathan
  • Ashwin Ravikumar
  • Marco Sammon

Abstract

We find that money managers could reduce portfolio risk by incorporating Environmental, Social, and Governance (ESG) criteria into their investment process. ESG-related issues can cause sudden regulatory changes and shifts in consumer tastes, resulting in large asset price swings which leave investors limited time to react. By incorporating ESG criteria in their investment strategy, money managers can tilt their holdings towards firms which are well prepared to deal with these changes, thereby managing exposure to these rare but potentially large risks.

Suggested Citation

  • Ravi Jagannathan & Ashwin Ravikumar & Marco Sammon, 2017. "Environmental, Social, and Governance Criteria: Why Investors are Paying Attention," NBER Working Papers 24063, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24063
    Note: AP EEE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w24063.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    2. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
    3. Ravi Bansal & Marcelo Ochoa & Dana Kiku, 2016. "Climate Change and Growth Risks," NBER Working Papers 23009, National Bureau of Economic Research, Inc.
    4. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
    5. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    6. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
    7. Zhuo Chen & Andrea Y. Lu & Zhuqing Yang, 2017. "Growing Pains: International Instability and Equity Market Returns," Financial Management, Financial Management Association International, vol. 46(1), pages 59-87, March.
    8. N/A, 2010. "2009 ACUPCC Climate Leadership Summit," Journal of Education for Sustainable Development, , vol. 4(1), pages 17-18, March.
    9. Erick Lachapelle & Matthew Paterson, 2013. "Drivers of national climate policy," Climate Policy, Taylor & Francis Journals, vol. 13(5), pages 547-571, September.
    10. Piotroski, JD, 2000. "Value investing: The use of historical financial statement information to separate winners from losers," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 1-41.
    11. Kent D. Daniel & Robert B. Litterman & Gernot Wagner, 2016. "Applying Asset Pricing Theory to Calibrate the Price of Climate Risk," NBER Working Papers 22795, National Bureau of Economic Research, Inc.
    12. Luca Tacconi, 2016. "Preventing fires and haze in Southeast Asia," Nature Climate Change, Nature, vol. 6(7), pages 640-643, July.
    13. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    14. Mendelsohn, Robert & Dinar, Ariel & Williams, Larry, 2006. "The distributional impact of climate change on rich and poor countries," Environment and Development Economics, Cambridge University Press, vol. 11(2), pages 159-178, April.
    15. Lisa Dilling & Elise Pizzi & John Berggren & Ashwin Ravikumar & Krister Andersson, 2017. "Drivers of adaptation: Responses to weather- and climate-related hazards in 60 local governments in the Intermountain Western U.S," Environment and Planning A, , vol. 49(11), pages 2628-2648, November.
    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. Małgorzata Janicka & Artur Sajnóg, 2023. "Do environmental and economic performance go hand in hand? An industrial analysis of European Union companies with the non‐parametric data envelopment analysis method," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(5), pages 2590-2605, September.
    2. Yuming Zhang & Juanjuan Zhang & Zhang Cheng, 2021. "Stock Market Liberalization and Corporate Green Innovation: Evidence from China," IJERPH, MDPI, vol. 18(7), pages 1-22, March.
    3. Malgorzata Janicka & Artur Sajnog, 2021. "The European Union’s Environmental Policy and Long-Term Investments of Enterprises," European Research Studies Journal, European Research Studies Journal, vol. 0(4B), pages 335-355.
    4. Christina E. Bannier & Yannik Bofinger & Björn Rock, 2023. "The risk-return tradeoff: are sustainable investors compensated adequately?," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 165-172, May.
    5. Zengfu Li & Liuhua Feng & Zheng Pan & Hafiz M. Sohail, 2022. "ESG performance and stock prices: evidence from the COVID-19 outbreak in China," Palgrave Communications, Palgrave Macmillan, vol. 9(1), pages 1-10, December.
    6. Bannier, Christina E. & Bofinger, Yannik & Rock, Björn, 2019. "Doing safe by doing good: ESG investing and corporate social responsibility in the U.S. and Europe," CFS Working Paper Series 621, Center for Financial Studies (CFS).
    7. Xiaoxiao Zhou & Ming Xia & Teng Zhang & Juntao Du, 2020. "Energy- and Environment-Biased Technological Progress Induced by Different Types of Environmental Regulations in China," Sustainability, MDPI, vol. 12(18), pages 1-26, September.
    8. Linda Espahbodi & Reza Espahbodi & Norma Juma & Amy Westbrook, 2019. "Sustainability priorities, corporate strategy, and investor behavior," Review of Financial Economics, John Wiley & Sons, vol. 37(1), pages 149-167, January.
    9. Sha, Yezhou & Zhang, Ping & Wang, Yiru & Xu, Yifan, 2022. "Capital market opening and green innovation——Evidence from Shanghai-Hong Kong stock connect and the Shenzhen-Hong Kong stock connect," Energy Economics, Elsevier, vol. 111(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. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, June.
    2. Wang, Feifei & Yan, Xuemin Sterling, 2021. "Downside risk and the performance of volatility-managed portfolios," Journal of Banking & Finance, Elsevier, vol. 131(C).
    3. Cederburg, Scott & O’Doherty, Michael S. & Wang, Feifei & Yan, Xuemin (Sterling), 2020. "On the performance of volatility-managed portfolios," Journal of Financial Economics, Elsevier, vol. 138(1), pages 95-117.
    4. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    5. Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2019. "Which Factors?," Review of Finance, European Finance Association, vol. 23(1), pages 1-35.
    6. Leonid Kogan & Mary Tian, 2012. "Firm characteristics and empirical factor models: a data-mining experiment," International Finance Discussion Papers 1070, Board of Governors of the Federal Reserve System (U.S.).
    7. Tran, Vu Le, 2023. "Sentiment and covariance characteristics," International Review of Financial Analysis, Elsevier, vol. 86(C).
    8. Andrew Y. Chen & Tom Zimmermann, 2022. "Open Source Cross-Sectional Asset Pricing," Critical Finance Review, now publishers, vol. 11(2), pages 207-264, May.
    9. Tobek, Ondrej & Hronec, Martin, 2021. "Does it pay to follow anomalies research? Machine learning approach with international evidence," Journal of Financial Markets, Elsevier, vol. 56(C).
    10. Franke, Benedikt & Müller, Sebastian & Müller, Sonja, 2017. "The q-factors and expected bond returns," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 19-35.
    11. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    12. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    13. Kewei Hou & Chen Xue & Lu Zhang, 2017. "Replicating Anomalies," NBER Working Papers 23394, National Bureau of Economic Research, Inc.
    14. Guanhao Feng & Stefano Giglio & Dacheng Xiu, 2020. "Taming the Factor Zoo: A Test of New Factors," Journal of Finance, American Finance Association, vol. 75(3), pages 1327-1370, June.
    15. Hoang, Khoa & Cannavan, Damien & Gaunt, Clive & Huang, Ronghong, 2019. "Is that factor just lucky? Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    16. Kristoffer Pons Bertelsen, 2022. "The Prior Adaptive Group Lasso and the Factor Zoo," CREATES Research Papers 2022-05, Department of Economics and Business Economics, Aarhus University.
    17. Klaus Grobys & James W. Kolari & Jere Rutanen, 2022. "Factor momentum, option-implied volatility scaling, and investor sentiment," Journal of Asset Management, Palgrave Macmillan, vol. 23(2), pages 138-155, March.
    18. Eero Pätäri & Timo Leivo, 2017. "A Closer Look At Value Premium: Literature Review And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 79-168, February.
    19. Dietz, Simon & Gollier, Christian & Kessler, Louise, 2018. "The climate beta," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 258-274.
    20. Stefano DellaVigna & Joshua M. Pollet, 2005. "Attention, Demographics, and the Stock Market," NBER Working Papers 11211, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:nbr:nberwo:24063. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.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.