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Home | Events Archive | The Cost of ESG Rating Uncertainty
Seminar

The Cost of ESG Rating Uncertainty

  • Location
    Erasmus University Rotterdam, Campus Woudestein, ET-14
    Rotterdam
  • Date and time

    December 05, 2024
    12:00 - 13:00

Abstract
More than thirty trillion dollars are allocated to ESG assets, despite the uncertainty on the true sustainability level of firms. We show within a dynamic portfolio allocation model that the effect of this uncertainty on investors’ portfolios and welfare strongly depends on their preferences. Based on institutional investors’ holdings, we identify two types of investors with non-pecuniary preferences: green investors whose utility increases with the estimated sustainability of firms, and threshold investors, whose non-pecuniary preferences only depend on whether a firm’s estimated sustainability level is below or above a threshold. We show that the uncertainty of the ESG rating is twice as costly for green investors than for threshold investors.