Searching for ESG Information: Heterogeneous Preferences and Information Acquisition

Abstract

We study how environmental, social, and governance (ESG) investing reshapes investors’ information-searching decisions. We develop a rational expectations equilibrium (REE) with endogenous information-searching decisions, in which traditional and green investors have distinct preferences for monetary and non-monetary risks. These investor groups seek different information from a security’s price. The heterogeneity in price interpretation makes investors with heterogeneous preferences focus more on the same risk component that is less represented in the price. Furthermore, trading intensities respond asymmetrically to different kinds of information. Traditional and green investors trade similar information in opposite ways. As more traditional investors switch to green trading, the price is more (less) informative about monetary (non-monetary) risks.