Zahra Hashemzadeh will present her paper “Corporates’ environmental merits: heterogeneous investors and portfolio performance” in the Finance Brownbag seminar. Find the abstract below. The seminar will take place online.
Abstract: The degree to which corporates actions benefit or harm environment is reported in a rating, namely environmental score (a granular part of environment, social and governance/ESG score). Recently, there has been increased interest by investors to incorporate such information to achieve financial returns while considering environmental concerns. However, empirical studies have reported an ambiguous relationship between portfolio performance and firms’ ESG choices. In this study, we investigate the channels through which environment scores affect portfolio performance. To measure the performance, we use a theoretical framework suggested by Pedersen et al. (2020) to form an efficient frontier, defined as the highest attainable Sharpe-ratio (SR) for each level of environment score. Following the same framework, we segregate the investors into an aware group which incorporate environment score in their estimation of risk and expected return and an unaware group who only maximize their unconditional mean-variance utility. In a country wise comparison of portfolio performance between the two groups, we find that the investors’ demand pressure is the most relevant explanatory factor for the cross-country differences in portfolio performance. The results show that in countries with higher demand for environmentally friendly stocks, overpricing of these stocks lead to a lower portfolio performance for aware investors. This evidence also confirms the heterogeneity of dominant investor types across countries.