Working Paper: NBER ID: w26549
Authors: Lubos Pastor; Robert F. Stambaugh; Lucian A. 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; Asset Pricing; Corporate Behavior
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ESG preferences (Q51) | asset prices (G19) |
| stronger ESG preferences (D11) | willingness to pay more for greener firms (Q52) |
| willingness to pay more for greener firms (Q52) | lower cost of capital for green firms (G32) |
| increased demand for green assets (Q21) | lower expected returns for green assets (G19) |
| ESG preferences (Q51) | increased market value of green firms (Q51) |
| dispersion of ESG tastes (F61) | size of ESG investment industry (F64) |
| stronger preferences for sustainability (Q01) | larger tilt in investment towards green firms (F64) |
| sustainable investing (Q01) | positive social impacts (O35) |
| increased demand for green assets (Q21) | enhanced market performance of green assets (G19) |
| ESG preferences (Q51) | feedback loop in asset prices (G19) |