Download This PaperStochastic ESG Scores and Nonpecuniary ESG Preferences: An Extension to CAPM
Finance Research Letters, 2025[10.1016/j.frl.2025.107179]
18 Pages Posted: 20 Dec 2023 Last revised: 31 Mar 2025
Date Written: March 24, 2025
Abstract
We propose an ESG-CAPM with stochastic ESG scores to address ESG score divergence and its uncertain impact on returns. Our model separates ESG utility from wealth, allowing ESG scores to adjust risk premia via market beta. Expected returns depend on both market and ESG betas, predicting higher returns when ESG betas exceed market betas. Investors demand higher returns for high ESG beta stocks, while greater weight on nonpecuniary utility lowers returns. Easily estimable, our model helps CFOs assess capital costs using CAPM-like methods and offers varied cost estimates based on different ESG rating agencies.
Keywords: ESG, CAPM, ESG beta, ESG Score
JEL Classification: G10,G11,G12
Suggested Citation: Suggested Citation
Nakagawa, Kei and Morita, Keisuke and Sakemoto, Ryuta, Stochastic ESG Scores and Nonpecuniary ESG Preferences: An Extension to CAPM (March 24, 2025). Finance Research Letters, 2025[10.1016/j.frl.2025.107179], Available at SSRN: https://ssrn.com/abstract=4657855 or http://dx.doi.org/10.1016/j.frl.2025.107179
Do you have a job opening that you would like to promote on SSRN?
Feedback
Feedback to SSRN