Abstract
This paper shows that strong ESG taste leads to higher tail risk in high-ESG (green) stocks compared to low-ESG (brown) stocks during market crashes. In crash episodes, strong ESG tastes induce investors to hold green stocks despite negative expected returns. Logically, the non-pecuniary benefit from ESG investing compensates for the dis-utility of financial loss. This expectation of price declines makes put options on green stocks more expensive and increases tail risk. I conduct a pseudo-causal analysis on the COVID-19 market crash that supports these theoretical findings. My findings provide novel implications for portfolio selection and risk management with ESG consideration.
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