Sustainable Investing in Equilibrium
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.
The views in this paper are the responsibility of the authors, not the institutions they are affiliated with. We are grateful for comments from our discussants Bernard Dumas, Harrison Hong and Jacob Sagi, and also from Rui Albuquerque, Malcolm Baker, George Constantinides, Alex Edmans, Gene Fama, Sam Hartzmark, John Heaton, Ravi Jagannathan, Ralph Koijen, Yrjo Koskinen, Stavros Panageas, Raghu Rajan, Jeff Wurgler, Josef Zechner, conference participants at the 2020 Spring NBER Asset Pricing Meeting, the 2020 SFS Cavalcade, and the 2020 INSEAD Finance Symposium, and seminar participants at the University of Chicago, WU Vienna, and the National Bank of Slovakia. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pastor is a member of the governing board of the National Bank of Slovakia whose responsibilities include serving as the principal regulator of investment funds in Slovakia. Yet the Bank has no stake in this research, no benefit from it, and no influence upon it.