Working Paper: NBER ID: w24063
Authors: Ravi Jagannathan; Ashwin Ravikumar; Marco Sammon
Abstract: We find that money managers could reduce portfolio risk by incorporating Environmental, Social, and Governance (ESG) criteria into their investment process. ESG-related issues can cause sudden regulatory changes and shifts in consumer tastes, resulting in large asset price swings which leave investors limited time to react. By incorporating ESG criteria in their investment strategy, money managers can tilt their holdings towards firms which are well prepared to deal with these changes, thereby managing exposure to these rare but potentially large risks.
Keywords: ESG; investment; portfolio risk; environmental regulation; consumer behavior
JEL Codes: G0; G12; H23; Q4; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Incorporating ESG criteria (G38) | Reduction in portfolio risk (G11) |
| Environmental crises (Q54) | Political disruptions (O17) |
| Political disruptions (O17) | Regulatory changes (G18) |
| Regulatory changes (G18) | Asset price swings (G19) |
| Political events (D72) | Market reactions in coal sector (L94) |
| Firms producing negative externalities (D62) | Regulatory scrutiny (G18) |
| Regulatory scrutiny (G18) | Changes in stock prices (G19) |