Sustainable investing with ESG rating uncertainty

Doron Avramov*, Si Cheng, Abraham Lioui, Andrea Tarelli

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

218 Scopus citations


This paper analyzes the asset pricing and portfolio implications of an important barrier to sustainable investing: uncertainty about the corporate ESG profile. In equilibrium, the market premium increases and demand for stocks declines under ESG uncertainty. In addition, the CAPM alpha and effective beta both rise with ESG uncertainty and the negative ESG-alpha relation weakens. Employing the standard deviation of ESG ratings from six major providers as a proxy for ESG uncertainty, we provide supporting evidence for the model predictions. Our findings help reconcile the mixed evidence on the cross-sectional ESG-alpha relation and suggest that ESG uncertainty affects the risk-return trade-off, social impact, and economic welfare.

Original languageAmerican English
Pages (from-to)642-664
Number of pages23
JournalJournal of Financial Economics
Issue number2
StatePublished - Aug 2022
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2021 Elsevier B.V.


  • Capital asset pricing model
  • ESG
  • Portfolio choice
  • Rating uncertainty


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