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Sustainable Investing in Equilibrium

Lubos Pastor (), Robert Stambaugh and Lucian Taylor
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Lucian Taylor: University of Pennsylvania - The Wharton School and NBER

No 2020-23, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We present a model of investing based on environmental, social, and gover- nance (ESG) criteria. In equilibrium, green assets have negative CAPM alphas, whereas brown assets have positive alphas. Green assetsÕ negative alphas stem from investorsÕ preference for green holdings and from green stocksÕ ability to hedge climate risk. Green assets can nevertheless outperform brown ones during good performance of the ESG factor, which captures shifts in customersÕ tastes for green products and investorsÕ tastes for green holdings. The latter tastes pro- duce 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 investorsÕ ESG preferences.

Keywords: sustainable investing; socially responsible investing; ESG; social impact (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2020
New Economics Papers: this item is included in nep-res
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https://repec.bfi.uchicago.edu/RePEc/pdfs/BFI_WP_202024.pdf (application/pdf)

Related works:
Working Paper: Sustainable Investing in Equilibrium (2019) Downloads
Working Paper: Sustainable Investing in Equilibrium (2019) Downloads
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