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Modelling Sustainable Investing in the CAPM

Author

Listed:
  • Thorsten Hens

    (University of Zurich; University of Lucerne; Norwegian School of Economics; and Swiss Finance Institute)

  • Ester Trutwin

    (University of Zurich)

Abstract

Empirical studies investigate various causes and effects of sustainable investments. While some attempts have been made to describe the results found by theoretical models, these are relatively complex and idiosyncratic. We relate to existing studies and use a parsimonious CAPM in which we model various aspects of sustainable investing. Our results find evidence that ESG-harmful investments require higher returns and ESG rating heterogeneity increases returns. Moreover, sustainable investing changes a firm’s production decision through two channels - the growth and the reform channel.

Suggested Citation

  • Thorsten Hens & Ester Trutwin, 2023. "Modelling Sustainable Investing in the CAPM," Swiss Finance Institute Research Paper Series 23-56, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2356
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    More about this item

    Keywords

    Sustainable Investing; ESG rating; CAPM; Growth Channel; Reform Channel;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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