ESG Divergence and the Market Environment

Abstract

We investigate whether differences in information and opinions among investors about the environmental, social, and governance performance of firms (“ESG divergence”) impact the liquidity and volume of their stocks. We find that these relations depend on ESG investor interest, which is not a proxy for the ESG quality (“greenness”) of a stock.

When ESG investors are interested in a stock and overweight it in their portfolios, lower divergence decreases spreads and increases volume, in line with implications of rational information asymmetry models. When ESG investors are disinterested in a stock and underweight it, lower divergence means less volume and larger spreads, in line with predictions of differences of opinions models. Divergence in the social dimension appears to be the main driver behind the relations we uncover.

We decompose the ESG divergence measure and show that most of the impact on liquidity and volume appears to come from an ESG divergence component that is also reflected in sell-side analysts’ forecasts dispersion. Lastly, we show that in a very low ESG disclosure environment, lower divergence decreases spreads irrespective of ESG investor interest.

Presented by Gideon Sarr