DP14171 Sustainable Investing in Equilibrium

Author(s): Lubo? Pástor, Robert F. Stambaugh, Lucian Taylor
Publication Date: December 2019
Keyword(s): ESG, social impact, Socially responsible investing, sustainable investing
JEL(s): G11, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14171

We present a model of investing based on environmental, social, and governance (ESG) criteria. In equilibrium, green assets have negative alphas, whereas brown assets have positive alphas. 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 investors' ESG preferences. When this dispersion shrinks, so does the ESG industry, even if all investors' ESG preferences are strong. Greener assets are more exposed to an ESG risk factor, which captures shifts in customers' tastes for green products or investors' tastes for green holdings. Under plausible conditions, the latter tastes produce positive social impact.