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Journal of Financial Economics Vol. 142 No. 2 2021

Sustainable investing in equilibrium

Ľuboš Pástor1,2,3; Robert F. Stambaugh4; Lucian A. Taylor4

1 University of Chicago · 2 National Bank of Slovakia · 3 Centre for Economic Policy Research · 4 University of Pennsylvania

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.

DOI
10.1016/j.jfineco.2020.12.011
Volume
142
Issue
2
Pages
550-571
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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