A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion
92 Pages Posted: 20 Sep 2019 Last revised: 16 Jan 2020
Date Written: January 5, 2019
This paper shows how sustainable investing affects asset returns through environmental, social, and governance (ESG) integration and exclusionary screening. I develop an asset pricing model with partial segmentation and disagreement. The occurrence of a taste premium, accompanied by a fall in the market premium, clarifies the relationship between ESG and financial performance. The exclusion effect is driven by two exclusion premia that generalize Merton's (1987) premium on neglected stocks. I construct a proxy for sustainable investors' tastes by comparing green with conventional fund holdings and estimate the model applied to green investing and sin stock exclusion using U.S. data for 2003-2018.
Keywords: sustainable finance, environmental finance, behavioral finance, ESG, tastes, sin stocks, segmentation
JEL Classification: G12, G11
Suggested Citation: Suggested Citation