Sustainable Investing in Equilibrium

53 Pages Posted: 16 Dec 2019

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: December 2019

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 firms greener and shifting real investment from brown to green firms. 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.

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Suggested Citation

Pastor, Lubos and Stambaugh, Robert F. and Taylor, Lucian A., Sustainable Investing in Equilibrium (December 2019). NBER Working Paper No. w26549. Available at SSRN: https://ssrn.com/abstract=3504432

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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

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