Responsible investing: Upside potential and downside protection?

authored by: Yumeng Gao, Andreas G.F. Hoepner, Marcel Prokopczuk, Florent Rouxelin, Christoph Matthias Würsig
Abstract: Conventional risk proxies are measured assuming that investors have symmetric risk preferences, with upside and downside deviations from the expectation being equivalently undesirable. Responsible investors, however, have dual financial aims of enhancing upside potential while reducing downside risk by actively incorporating environmental, social, and governance (ESG) aspects into the investment process. We utilize a non-symmetric option pricing research design to test whether responsible investors could live up to their ambitions. We find that those who are simply Principles for Responsible Investment (PRI) members do not deliver the desirable asymmetric performance, while financial firms with highly rated responsible investment processes can actually achieve both aims for their own shareholders: enhancing upside potentials and protecting themselves from downside risks.
Organisation(s): Institute of Finance and Commodity Markets
External Organisation(s): Yale University
University College Dublin
Florida International University
Type: Article
Journal: International Review of Financial Analysis
Volume: 97
ISSN: 1057-5219
Publication date: 01.2025
Publication status: Published
Peer reviewed: Yes
ASJC Scopus subject areas: Finance, Economics and Econometrics
Electronic version(s): https://doi.org/10.1016/j.irfa.2024.103754 (Access: Closed)

BibTeX

@article{92c35e0f0e614586919edf36bed6ed47,
title = "Responsible investing: Upside potential and downside protection?",
abstract = "Conventional risk proxies are measured assuming that investors have symmetric risk preferences, with upside and downside deviations from the expectation being equivalently undesirable. Responsible investors, however, have dual financial aims of enhancing upside potential while reducing downside risk by actively incorporating environmental, social, and governance (ESG) aspects into the investment process. We utilize a non-symmetric option pricing research design to test whether responsible investors could live up to their ambitions. We find that those who are simply Principles for Responsible Investment (PRI) members do not deliver the desirable asymmetric performance, while financial firms with highly rated responsible investment processes can actually achieve both aims for their own shareholders: enhancing upside potentials and protecting themselves from downside risks.",
keywords = "Downside risk, ESG opportunity and risk, Institutional investor, Investing objective, Option implied volatility, Responsible investing, Upside potential",
author = "Yumeng Gao and Hoepner, {Andreas G.F.} and Marcel Prokopczuk and Florent Rouxelin and W{\"u}rsig, {Christoph Matthias}",
year = "2025",
month = jan,
doi = "10.1016/j.irfa.2024.103754",
language = "English",
volume = "97",
journal = "International Review of Financial Analysis",
issn = "1057-5219",
publisher = "Elsevier Inc.",
}