Does ESG improve market efficiency?

This blog shows insights into an investigation of the impact of ESG (Environmental, Social, and Governance) on market efficiency. The researchers conducted a lab experiment to examine the degree of investors' disagreement toward a security's return, given ESG information, compared with non-ESG information. B. Dong Finance, School of Business and Economics In my previous blog ( Altruists going on an ego trip of pursuing wealth and fame ), we find that investors may become to be irrational when they take into account stocks' ESG information. Toward high ESG stocks, they expect a higher return, perceive lower risk, and become less ambiguity-averse, which means they tend to believe that high ESG stocks have a higher sharp ratio than non-ESG stocks and positively invest in ESG. However, does it mean that the ESG label can induce less disagreement of stock performance between investors and therefore improve market efficiency? Disagreement toward ESG. The efficient market hypothesis assumes financial securities are always priced correctly by investors, and hence there is no disagreement toward a security performance among investors in an efficient market. But, in reality, the financial market has never been an efficient one because of, for instance, irrationality and limits to arbitrage.