ESG asset demand with information costs

We study a market with non-iid returns linked to an ESG (Environmental, Social and Governance) and a market factor. Motivated by empirical evidence, we assume that the investor does not know which part of the return is due to the ESG component, unless he pays a cost. The approach is consistent with risk premia on green assets greater or lower than the ones on market-only related assets. We provide conditions on the persistence, weight and estimation error in the ESG factor, to optimally invest in ESG-assets. By calibrating the model to the German twin Govies 2020-2024, we separate the ESG from the market risk factor and provide conditions for the greenium to be negative. We show that it is rational to invest in green bonds if information costs are below 0.07 bps per day, to abstain if they are greater. Investing in the green German bond without getting informed is always suboptimal.