Modelling Demand for ESG

Ahmed, M. F., Gao, Y. and Satchell, S.

Existing approaches have considered characteristics of Environmental, Social and Governance (ESG) focused investments from a return-oriented perspective, not paying due consideration to investors’ utility and how ESG features impact utility. We contribute to this literature by providing a model that captures the implications for investment if ESG is valued by the investor as well as wealth. We first present the necessary theory and discuss the rather challenging problem of calibration of the various risk and preference parameters. Using Thomson Reuters ESG data from 2002 to 2018, we provide further empirical evidence that investors who value ESG factors have improved utilities which does not come at the cost of return performance.