Is the ESG Score Part of the Set of Information Available to Investors? A Conditional Version of the Green Capital Asset Pricing Model

Lucía Galicia-Sanguino () and Rubén Lago-Balsalobre
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Lucía Galicia-Sanguino: Department of Business Administration, Rey Juan Carlos University, 28032 Madrid, Spain
Rubén Lago-Balsalobre: Department of Business Administration, Rey Juan Carlos University, 28032 Madrid, Spain

IJFS, 2025, vol. 13, issue 2, 1-20

Abstract: In this paper, we propose a linear factor model that incorporates investor preferences toward sustainability to analyze indirect effects that climate concerns may have on asset prices. Our approach is based on the relationship between environmental, social, and governance (ESG) investing and climate change considerations by investors. We use ESG scores as a part of the information set used by investors to determine the unconditional version of the conditional capital asset pricing model (CAPM). Our results show that the ESG score allows the linearized version of the conditional CAPM to greatly outperform the classic CAPM and the Fama–French three-factor model for different sorts of stock portfolios, contributing significantly to reducing pricing errors. Furthermore, we find a negative price of risk for stocks that covary positively with ESG growth, which suggests that green assets may perform better than brown ones if ESG concerns suddenly become more pressing over time. Thus, our paper constitutes a step forward in the attempt to shed light on how climate change is priced regardless of the climate risk measure used.

Keywords: asset pricing; sustainable finance; climate change; ESG; conditioning information (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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