KCFR Funded Research 2022

The Cost of ESG Investing

(Laura Lindsey, Seth Pruitt, and Christoph Schiller, Arizona State University)

This project seeks to answer the question: Can ESG portfolios be formed “for free,” and if yes, why? Using data from four major ESG providers, we construct ESG portfolios and find that ESG measures do not predict returns, given the rich conditioning information available to investors, so ESG factors can be used as an overlay on benchmark portfolios to downweight poor ESG firms without a reduction in performance.

Is There a Performance Penalty to Sustainable Bond Investing

(Ji Min Park and Neil D. Pearson, University of Illinois)

ESG research has focused almost exclusively on equities. The goal of this project is to provide evidence on the return penalty, if any, borne by an ESG-oriented fixed-income investor. We use each category, E, S, and G to categorize corporate bonds according to their ESG profiles. We then estimate the abnormal returns of the bonds using different benchmarks. We focus on the degree to which returns vary with the issuers’ ESG profile.

The Cost of Sustainable Investing

(Hao Jiang, Michigan State University)

We want to explore how shifts in investor tastes and demand drive the prices and returns of green and brown stocks. We will use global fund flows to estimate the impact of shifts in investors' preferences and price impacts on the two types of stocks. The implementation of the SFDR in Europe serves as a natural experiment to observe how investors reallocate funds in response to disclosures of whether a fund pursues a sustainable investment objective or not.