Disagreement, tastes, and asset prices

Avramov, Cheng et al. (2021), Fama and French (2007), Heinkel et al. (2001), and Berk and van Binsbergen (2021) obtain a negative ESG-expected return relationship in a one-period equilibrium model.

“For instance, Avramov, Cheng et al. (2021), Fama and French (2007), Heinkel et al. (2001), and Berk and van Binsbergen (2021) obtain a negative ESG-expected return relationship in a one-period equilibrium model.”

Some economic agents derive non-pecuniary benefits from holding green assets.

“Alternatively, another strand of the literature considers that some economic agents derive non-pecuniary benefits from holding green assets (e.g., S. Baker et al., 2022;Fama & French, 2007).”

According to equilibrium models with heterogeneous tastes for ESG investments, green assets are expected to generate lower returns in the long run compared to non-ESG counterparts.

“Through the lens of equilibrium models of agents with heterogeneous tastes for ESG investments, green assets are expected to generate lower returns in the long run compared to their non-ESG counterparts.”

Fama and French (2007) argue that the asset pricing implications in an economy where some investors have tastes for assets as consumption goods are similar to those that arise when some investors trade based on misinformed beliefs.

“Fama and French (2007) argue that the asset pricing implications in an economy where some investors have tastes for assets as consumption goods are similar to those that arise when some investors trade based on misinformed beliefs.”

Theoretical models typically treat green assets as consumption goods to incorporate investor preferences for sustainable investing.

“To incorporate investor preferences for sustainable investing, theoretical models typically treat green assets as consumption goods”

Previous studies have argued that the behavior of ESG investors is closely related to that of misinformed ones.

“Previous studies have argued that the behavior of ESG investors is closely related to that of misinformed ones (Fama & French, 2007).”

Agents with inferior forecasts face either the prospect of being driven out of the market by agents with correct beliefs and have their price impact destroyed, or they survive by improving their forecasts through learning.

“Agents with inferior forecasts face either the prospect of being driven out of the market by agents with correct beliefs and have their price impact destroyed, or they survive by improving their forecasts through learning.”

Firms can pursue CSR activities with negative NPV and still act in the interest of shareholders when at least some shareholders put a non-monetary value on CSR or have preferences for specific CSR issues.

“However, firms could also pursue CSR activities with negative NPV and still act in the interest of shareholders, when (at least some) shareholders put a non-monetary value on CSR or have preferences for specific CSR issues (e.g., Fama and French 2007; Friedman and Heinle 2016; Hart and Zingales 2017).”

Investors can have different tastes for CSR activities.

“One reason to analyze effects on investor portfolio holdings is that investors can have different tastes for CSR activities (e.g., Fama and French 2007; Friedman and Heinle 2016).”

If some investors have nonfinancial CSR preferences, they are willing to accept lower expected returns from firms that satisfy these preferences, resulting in a lower cost of capital.

“Fama and French (2007) and Friedman and Heinle (2016) show that if some investors have nonfinancial CSR preferences, they are willing to accept lower expected returns from firms that satisfy these preferences, resulting in a lower cost of capital.”