Responsible investments: an analysis of preference – the influence of local political views on the return on ESG portfolios

Abstract

We analyse whether environmental, social, and governance (ESG) investments generate different abnormal returns depending on preferences towards responsible assets in the United States. To measure investor preferences for ESG assets, we consider whether the company’s headquarters is located in a Democratic or Republican state and how the state scored in an Environmental survey from Yale University. When investors strongly prefer responsible investments (Democrats), the abnormal returns on ESG investments in these states are negative. Since ESG-motivated investors gain additional utility by holding green assets, they are willing to sacrifice a portion of their returns to incorporate the ESG factor into their portfolio. Conversely, when investors do not value ESG factors to the same extent (Republicans), abnormal returns are not significantly different from zero. We also divide states according to their opinions on environmental issues using a survey and perform the same analysis, confirming the previous results. Our methodology gains validity since the U.S. is in a home bias context. As a result, people tend to invest more in their home state; thus, the returns will reflect their preferences. Furthermore, the results of our research agree with existing theories connecting preferences for ESG investments and expected excess returns.