Responsible investments: An analysis of preference - The influence of local political views on ESG portfolio return

Abstract: The objective of this study is to analyze whether environmental, social, and governance (ESG) investments generate different abnormal excess returns depending on preferences towards ESG assets in the United States. We aim to verify whether these results are consistent with the previously exposed theories explaining the relationships between ESG preferences and excess returns. To measure investor preferences for ESG assets, two different proxies are used: whether the headquarter of the company resides in a Democratic or Republican state, and how the state scored in an Environmental survey from Yale University. Our paper presents evidence that when investors have a strong preference for socially and environmentally responsible investments (Democrats), the abnormal excess returns on ESG investments in these states are negative. Since ESG-motivated investors gain additional utility by holding green assets, they are willing to sacrifice a portion of their returns to incorporate the ESG factor into their portfolio. Conversely, when investors do not value ESG factors to the same extent (Republicans), abnormal excess returns are not significantly different from zero. As a corollary, we also divided states according to their opinions on environmental issues using a Yale University survey and performed the same analysis, confirming the previous results. Our methodology gains validity since the U.S. is in a context of home bias (Coval and Moskowitz, 1999). As a result, people will tend to invest more in their home state, thus the returns will reflect their preferences. Furthermore, the results of our research and the theories it supports are in agreement with the theories of Pastor et al. (2020) and Pedersen et al. (2020), which connect preferences for ESG investments and expected excess returns.