Nº 21-39: Unlocking ESG Premium from Options

We find that option expensiveness, as measured by implied volatility, is higher for low-ESG stocks, showing that investors pay a premium in the option market to hedge ESG-related uncertainty. Using delta-hedged option returns, we estimate this ESG premium to be about 0.3% per month. All three components of ESG contribute to option pricing. The effect of ESG performance heightens after the announcement of Paris Agreement, after speeches of Greta Thunberg, and in the aftermath of Me-Too movement. We find that investors pay ESG premium to hedge volatility, jump, and other higher moment risks. The influence of ESG on option premia is stronger for firms that are closer to end-consumers, facing severer product competition, with higher investors’ ESG awareness, and without corporate hedging activity.