Working Paper: CEPR ID: DP14171
Authors: Lubo Pstor; Robert F. Stambaugh; Lucian Taylor
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.
Keywords: sustainable investing; ESG; socially responsible investing; social impact
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger ESG preferences (D11) | Expected returns for green assets (G19) |
| ESG factor (Q51) | Returns for green assets (G19) |
| ESG factor (Q51) | Returns for brown assets (G19) |
| ESG factor (Q51) | Performance of green assets (G19) |
| Sustainable investing (Q01) | Positive social impact (O35) |
| Climate risk (Q54) | Expected returns based on firms' exposures to climate shocks (G17) |
| Brown assets (L66) | Expected returns due to exposure to climate shocks (Q54) |
| Investor preferences (G11) | Expected returns on green assets (G19) |