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Sustainable Investing in Equilibrium

Author

Listed:
  • Lubos Pastor

    (University of Chicago - Booth School of Business)

  • Robert F. Stambaugh

    (University of Pennsylvania - The Wharton School and NBER)

  • Lucian A. Taylor

    (University of Pennsylvania - The Wharton School and NBER
    Sustainable Investing in Equilibrium)

Abstract

We present a model of investing based on environmental, social, and gover- nance (ESG) criteria. In equilibrium, green assets have negative CAPM alphas, whereas brown assets have positive alphas. Green assets’ negative alphas stem from investors’ preference for green holdings and from green stocks’ ability to hedge climate risk. Green assets can nevertheless outperform brown ones during good performance of the ESG factor, which captures shifts in customers’ tastes for green products and investors’ tastes for green holdings. The latter tastes pro- duce positive social impact by making firms greener and shifting real investment from brown to green firms. The ESG investment industry is at its largest, and the alphas of ESG-motivated investors are at their lowest, when there is large dispersion in investors’ ESG preferences.

Suggested Citation

  • Lubos Pastor & Robert F. Stambaugh & Lucian A. Taylor, 2020. "Sustainable Investing in Equilibrium," Working Papers 2020-23, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2020-24
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    References listed on IDEAS

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    More about this item

    Keywords

    sustainable investing; socially responsible investing; ESG; social impact;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:

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