Research

Job Market Paper

Previously circulated under the title ``Talk or Walk the Talk? The Real Impact of ESG Investing.''

Abstract: I propose a model to examine how investors with ESG preferences jointly influence firms' real green investments and greenwashing. Paradoxically, stronger investor ESG preferences may reduce real green investments due to increased greenwashing, which undermines the reliability of ESG information. When this information distortion is severe, firms are disincentivized to make real green investments, as the market-perceived ESG gains are obscured by misinformation, while the financial costs of green investments are still reflected in stock prices. This paradox is most likely when the cost of manipulating ESG information is low, the correlation between ESG and financial fundamentals is weak, and financial information quality is high. Additionally, brown firms with poorer financial performance tend to greenwash more. These findings raise concerns that ESG investing could backfire without effective disclosure regulations. I analyze two practical measures to enhance real impact: diversifying green technology options and linking executive pay to ESG outcomes.

Presented at: Northern Finance Association, Midwest Finance Association, Finance Theory Group Summer School, American Finance Association (Poster Session), Wharton 

Other Working Papers

with Itay Goldstein

Abstract: A common critique of ESG divestment is that traditional investors can buy divested stocks, thus neutralizing the intended impact. We propose a novel mechanism showing how ESG divestment can incentivize firms to adopt ESG practices, even when the fraction of ESG capital is limited. The key condition for impact is that ESG investors maintain a balanced emphasis on both ESG and financial fundamentals, coupled with private information on both. When ESG investors sell stocks, their trading motives remain uncertain to traditional investors. Traditional investors interpret selling as a potential bad signal about financial value, driving down stock prices. Therefore, firms may adopt ESG practices to avoid this negative price impact. We also show that this disciplining effect on firms' ESG practices is non-monotonic in investor ESG preferences. Particularly, when investor ESG preferences are too strong, the uncertainty about their trading motives vanishes, reducing the impact of divestment. Our findings provide novel empirical implications and offer important guidance for impact investors.

Abstract: I analyze how ESG information disclosure affects real investment in a model where ESG investors can change the cost of capital and incentivize the manager to make the socially optimal investment. Second-order beliefs about the ESG fundamental drive the equilibrium investment and create distortion since the manager does not have direct concerns about ESG. I show that more disagreement in private information among ESG investors always increases the distortion, while more disagreement among public ESG ratings might decrease the distortion under some conditions. Moreover, I show that pushing for more disclosure to decrease common noise in ESG ratings (e.g., corporate mandatory ESG disclosure) might harm real efficiency. My model addresses the concern about ESG rating disagreement and offers important policy implications for regulating ESG information disclosure.

Selected Work in Progress

with Ken Deng and Itay Goldstein