Abstract

AbstractThis study examines the recent literature on the expectations, beliefs and perceptions of investors who incorporate Environmental, Social, Governance (ESG) considerations in investment decisions with the aim to generate superior performance or make a societal impact. Through the lens of equilibrium models of agents with heterogeneous tastes for ESG investments, green assets are expected to generate lower returns in the long run compared to their non‐ESG counterparts. However, in the short run, ESG investments can outperform non‐ESG investments through various channels. Empirically, results for the relative performance to ESG investment are mixed. We find strong empirical evidence in the literature that investors have a preference for ESG and that their actions can generate positive social impact through engagement. The shift towards more sustainable policies in firms is motivated by the increased market values and the lower cost of capital of green firms driven by investors’ choices.

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