ESG disclosure and investor welfare under asymmetric information and imperfect competition

We study the welfare effect of ESG disclosure in a market with information asymmetry and imperfect competition. We develop a rational expectations equilibrium in which small and large investors have heterogeneous valuations of a risky asset. More precise ESG disclosure would result in small investors providing less liquidity and, in turn, less aggressive trading by larger investors. This interaction between different classes of investors triggered by ESG disclosures leads to some novel results in this paper. First, improving the precision of ESG disclosures makes small investors worse off. Second, the welfare of the large investors is hump-shaped in ESG disclosure precision. Third, although the disclosure policy that maximizes liquidity also maximizes the welfare of small investors, it is not efficient because it may harm the welfare of large investors.