Sustainable Investing in Equilibrium

54 Pages Posted: 19 Dec 2019 Last revised: 12 Aug 2020

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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: June 4, 2020

Abstract

We model investing that considers environmental, social, and governance (ESG) criteria. In equilibrium, green assets have low expected returns because investors enjoy holding them and because green assets hedge climate risk. Green assets nevertheless outperform when positive shocks hit the ESG factor, which captures shifts in customers' tastes for green products and investors' tastes for green holdings. The ESG factor and the market portfolio price assets in a two-factor model. The ESG investment industry is largest when investors' ESG preferences differ most. Sustainable investing produces positive social impact by making firms greener and by shifting real investment toward green firms.

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 (June 4, 2020). Chicago Booth Research Paper No. 20-12, Fama-Miller Working Paper, Journal of Financial Economics (JFE), Forthcoming, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3498354 or http://dx.doi.org/10.2139/ssrn.3498354

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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773-834-4080 (Phone)
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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Lucian A. Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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

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