A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion
97 Pages Posted: 20 Sep 2019 Last revised: 14 Oct 2020
Date Written: October 13, 2020
This paper shows how sustainable investing affects asset returns through exclusionary screening and environmental, social, and governance (ESG) integration. I develop an asset pricing model with partial segmentation and heterogeneous preferences. I characterize two taste premia that clarify the relationship between ESG and financial performance and two exclusion premia generalizing Merton's (1987) premium on neglected stocks. By using the holdings of 453 green funds investing in U.S. stocks between 2007 and 2019 to proxy for sustainable investors' tastes, I estimate the model applied to green investing and sin stock exclusion. The annual taste effect ranges from -1.12% to +0.14% for the different industries and the average exclusion effect is 1.43%.
Keywords: sustainable finance, environmental finance, behavioral finance, ESG, tastes, sin stocks, segmentation
JEL Classification: G12, G11
Suggested Citation: Suggested Citation