Are investor preferences for ESG driven by sentiment and national culture?

This study examines changes in the environmental, social, and governance (ESG)–return relationship in terms of sentiment and national culture using a large international sample for the 2005–2023 period. First, we confirm that portfolios with higher ESG scores exhibit lower expected returns based on findings from ten different ESG–based portfolios. We then prove, through a cross–sectional analysis, that a negative ESG premium is due to mispricing based on firm–specific characteristics. ESG premium is evident during periods of low investor sentiment. Furthermore, the impact of ESG premium differs across countries, according to uncertainty avoidance and tolerance. This shift toward improved sustainability appears to be heavily influenced by investors’ preferences, especially in nations with high uncertainty tolerance when sentiment is low.