Sustainable Investing in Equilibrium

Pastor, Lubos; Stambaugh, Robert F.; Taylor, Lucian A.

Sustainable Investing in Equilibrium

44 Pages Posted: 17 Dec 2019

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

There are 3 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 alphas, whereas brown assets have positive alphas. 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. When this dispersion shrinks, so does the ESG industry, even if all investors' ESG preferences are strong. Greener assets are more exposed to an ESG risk factor, which captures shifts in customers' tastes for green products or investors' tastes for green holdings. Under plausible conditions, the latter tastes produce positive social impact.

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

JEL Classification: G11, G12

Suggested Citation: Suggested Citation

Pastor, Lubos and Stambaugh, Robert F. and Taylor, Lucian A., Sustainable Investing in Equilibrium (December 2019). CEPR Discussion Paper No. DP14171. Available at SSRN: https://ssrn.com/abstract=3504600