Unlocking ESG Premium from Options

We find that option expensiveness, as measured by delta-hedged option returns, is higher for low-ESG stocks, indicating that investors pay a premium in the option market to hedge ESG-related uncertainty. We estimate this ESG premium to be about 0.3% per month. All three components of ESG contribute to option pricing. We find that investors pay the ESG premium to hedge jump risks, but not volatility risks. The effect of ESG performance is more prominent during the periods when the attention to ESG is higher and for firms that are more subject to ESG-related risks.