Abstract
We investigate the investor surplus of sustainable investments, which is defined as a difference between the actual and willingly accepted risk-adjusted losses by Environmental, Social, and Governance (ESG) investors, prior to and during COVID-19 pandemic. The willing accepted maximum loss is a result of investing in the ESG portfolio rather than the market portfolio. It is a negative function of risk aversion and thus, crisis would have a negative impact on the willing accepted losses. The aim of this paper is to empirically identify whether there is an investor surplus during the COVID pandemic, even though it is not possible to quantify the surplus. The underlying assumption is that the willing accepted loss is a positive function of characteristics of ESG portfolio. This loss would persist as a negative value even in times of crisis. A non-negative risk-adjusted financial return would indicate a favorable investor surplus for those investing in ESG. The empirical analysis is based on 19 Morgan Stanley Capital International (MSCI) country ESG Leaders indices, which screen out assets with the lower-than-average ESG scores in the national market portfolios, during the period 2017 to 2021. Based on the standard Capital Asset Pricing Model (CAPM), we employ Markov Switching Autoregressive (ARMS) approach to identify crisis regime. Our empirical evidence shows that insignificant risk-adjusted returns might imply positive investor surplus for ESG investors, even during the COVID-19 crisis.