A1017
Title: Why the ESG boom? Ambiguity's Catalyst in U.S. Funds and Global Limits
Authors: Marcella Lucchetta - university of Venice (Italy) [presenting]
Abstract: The global ESG investment market reached $28.36 trillion in 2024 and is projected to reach $35 trillion in 2025. The driving factors are investor demand and regulation. This article examines how ambiguity aversion affects ESG asset allocation under regulatory uncertainty, suggesting that ambiguity influences decisions beyond traditional risk models. Our theoretical model predicts underinvestment in ESG assets due to ambiguity, but analysis of seven leading US ESG funds shows that increased ambiguity, as measured by the News-Based EPU Index, increases ESG returns. Market risk reduces returns, and SEC disclosure requirements reduce performance, likely due to compliance costs. ESG funds outperform the S&P 500 Index, explaining most of the return variance, and serve as a safe haven. These findings position ambiguity as a driver of ESG growth through an ambiguity premium, and challenge risk-focused investment theories. Policymakers should balance transparency and flexibility, and investors can benefit from the resilience of ESG in uncertain markets.While theoretical models predict ambiguity as a deterrent to green investments, our findings reveal a context-specific safe-haven effect in mature U.S. markets. This does not hold globally; in developing or rural areas with weak regulations, ambiguity likely deters flows, aligning with theory and underscoring the need for nuanced policy in high-need regions.
