Sustainable Investing in Equilibrium

53 Pages Posted: 24 Mar 2020

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Multiple version iconThere are 4 versions of this paper

Date Written: February 14, 2020

Abstract

We present a model of investing based on environmental, social, and governance (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 produce positive social impact by making rms greener and shifting real investment from brown to green rms. 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.

Keywords: sustainable investing, socially responsible investing, ESG, social impact

JEL Classification: G11, G12

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F. and Taylor, Lucian A., Sustainable Investing in Equilibrium (February 14, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-24, Available at SSRN: https://ssrn.com/abstract=3559432 or http://dx.doi.org/10.2139/ssrn.3559432

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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National Bureau of Economic Research (NBER)

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Lucian A. Taylor

University of Pennsylvania - The Wharton School ( email )

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Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

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