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A quantitative model of sustainability risk in finance

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  • Kanamura, Takashi

Abstract

We aim to formulate sustainability risk (Srisk) quantitatively in finance for the first time and validate the formulation by conducting empirical analyses. Applying the general sustainability concept to finance supported by existing studies proposes a new financial and quantitative model of Srisk defined by the price differences between sustainable and conventional assets and characterized by mean-reversion, cyclicity, and diversification effects on market risk. Then, the parameter estimation results of the model using ESG and the corresponding stock indexes confirm these three characteristics and indicate the convergence of expected returns of ESG indexes over stock indexes, resulting in the feasibility of securing returns in the pairs trading. Finally, we discuss the model’s robustness regarding Srisk’s three characteristics and the regime-switching of Srisk’s mean-reversion due to fundamental shifts by conducting econometric analyses of sustainable asset prices.

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  • Kanamura, Takashi, 2025. "A quantitative model of sustainability risk in finance," Journal of Commodity Markets, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:jocoma:v:37:y:2025:i:c:s2405851325000017
    DOI: 10.1016/j.jcomm.2025.100457
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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