{"title":"ESG asset demand with information costs","authors":"Elisa Luciano, Antonella Tolomeo","doi":"10.1007/s10436-025-00462-z","DOIUrl":null,"url":null,"abstract":"<div><p>We study a market with non-iid returns linked to an ESG (Environmental, Social and Governance) and a market factor. Motivated by empirical evidence, we assume that the investor does not know which part of the return is due to the ESG component, unless he pays a cost. The approach is consistent with risk premia on green assets greater or lower than the ones on market-only related assets. We provide conditions on the persistence, weight and estimation error in the ESG factor, to optimally invest in ESG-assets. By calibrating the model to the German twin Govies 2020–2024, we separate the ESG from the market risk factor and provide conditions for the greenium to be negative. We show that it is rational to invest in green bonds if information costs are below 0.07 bps per day, to abstain if they are greater. Investing in the green German bond without getting informed is always suboptimal.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"21 2","pages":"189 - 209"},"PeriodicalIF":0.7000,"publicationDate":"2025-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://link.springer.com/content/pdf/10.1007/s10436-025-00462-z.pdf","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Annals of Finance","FirstCategoryId":"1085","ListUrlMain":"https://link.springer.com/article/10.1007/s10436-025-00462-z","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
We study a market with non-iid returns linked to an ESG (Environmental, Social and Governance) and a market factor. Motivated by empirical evidence, we assume that the investor does not know which part of the return is due to the ESG component, unless he pays a cost. The approach is consistent with risk premia on green assets greater or lower than the ones on market-only related assets. We provide conditions on the persistence, weight and estimation error in the ESG factor, to optimally invest in ESG-assets. By calibrating the model to the German twin Govies 2020–2024, we separate the ESG from the market risk factor and provide conditions for the greenium to be negative. We show that it is rational to invest in green bonds if information costs are below 0.07 bps per day, to abstain if they are greater. Investing in the green German bond without getting informed is always suboptimal.
期刊介绍：
Annals of Finance provides an outlet for original research in all areas of finance and its applications to other disciplines having a clear and substantive link to the general theme of finance. In particular, innovative research papers of moderate length of the highest quality in all scientific areas that are motivated by the analysis of financial problems will be considered. Annals of Finance''s scope encompasses - but is not limited to - the following areas: accounting and finance, asset pricing, banking and finance, capital markets and finance, computational finance, corporate finance, derivatives, dynamical and chaotic systems in finance, economics and finance, empirical finance, experimental finance, finance and the theory of the firm, financial econometrics, financial institutions, mathematical finance, money and finance, portfolio analysis, regulation, stochastic analysis and finance, stock market analysis, systemic risk and financial stability. Annals of Finance also publishes special issues on any topic in finance and its applications of current interest. A small section, entitled finance notes, will be devoted solely to publishing short articles – up to ten pages in length, of substantial interest in finance. Officially cited as: Ann Finance
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