Are You Betting on Sustainability?

Abstract

When the sustainability of assets is priced, its impact on discount rates depends not only on the asset's sustainability but intrinsically also on its risk profile. This has implications often overlooked in portfolios used to assess the sustainability premium or to hedge sustainability-related shocks. Specifically, the average returns of sustainability-sorted long-short portfolios are shaped by the risk profiles of their components, even when the portfolio is risk-neutral, which also affects the portfolio's sensitivity to shifts in sustainability concerns. Using Refinitiv ESG scores for US stocks, a weak sustainability premium is observed, whose significance differs importantly from that of the plain long-short portfolio returns.

Keywords: Asset Pricing, Portfolio Choice, ESG, Sustainable Investment

JEL Classification: D62, G11, G12, M14, Q5