A1017
Title: Why the ESG boom?
Authors: Marcella Lucchetta - university of Venice (Italy) [presenting]
Abstract: The global ESG (Environmental, Social, Governance) investment market surged to \$28.36 trillion in 2024, driven by investor demand and regulatory momentum. The purpose is to investigate the role of ambiguity aversion in ESG asset allocation under uncertain regulatory frameworks, proposing that ambiguity, reflecting market sentiment, shapes investment decisions beyond traditional risk models. A theoretical model of decision-making is developed between ESG and traditional assets, predicting an ESG gap due to underinvestment under ambiguity. Contrary to expectations, a random-effects GLS regression on seven major U.S. ESG equity funds from January 2018 to December 2024 (581 monthly observations) reveals that ambiguity, proxied by Baker's news-based EPU index, boosts ESG returns by 1.62 percentage points per 0.1 EPU increase. Market risk (VIX) reduces returns, while SEC's 2021 disclosure requirements unexpectedly depress performance, suggesting compliance costs. Excess returns over the S\&P 500 explain 71.7\% of return variation, positioning ESG as a safe-haven asset. This reframes ambiguity as a catalyst for the ESG boom, challenging risk-centric models and offering implications for financial theory and regulatory design. Policymakers should balance transparency with flexibility to support ESG growth, while investors can leverage ESG's resilience in uncertain markets.
