Sustainable investing in equilibrium

By Ľuboš Pástor, Rob Stambaugh, Lucian A. Taylor. Journal of Financial Economics, 2019

1,484 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/a36664ad3e0c5d28993e7a971f83f6b07b09e465

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Citations in the corpus

Aggregate Confusion: The Divergence of ESG Ratings (2020, neutral): “Investor tastes can influence asset prices (Fama and French, 2007; Hong and Kacperczyk, 2009; Pastor et al., 2020), but only when a large enough fraction of the market holds and implements a uniform nonfinancial preference.”
The Pollution Premium (2023, background): “We find that Emission is generally not highly correlated with other variables, except that its 16The database has been used in previous studies on environmental, social, and corporate governance issues (e.g., Ferrell, Liang, and Renneboog (2016), Liang and Renneboog (2017), Dyck et al. (2019)).”
A Theory of Socially Responsible Investment (2020, background): “Assets under management in socially responsible funds have grown manifold,(1) and many traditional investors consider augmenting their asset allocation with environmental, social, and governance (ESG) scores (Pastor et al., 2019, Pedersen et al., 2019). From an asset management perspective, this tre”
Mandatory CSR and sustainability reporting: economic analysis and literature review (2019, background): “Second, firms’ ESG risk exposures as well as investors’ CSR preferences can (directly) affect the cost of capital, which provides incentives for firms to improve their CSR performance, reduce their risk exposures, or align their investments with investors’ CSR preferences (e.g., Pástor et al. 2020).”
Disaster Resilience and Asset Prices (2020, neutral): “of country-level stock market indices to COVID-19: Ru et al. (2020) find that stock markets in countries with 2003 SARS experience reacted more quickly to the outbreak than countries without prior experience, while Gerding et al.”
ESG Preference, Institutional Trading, and Stock Return Patterns (2020, positive): “One might think that limited attention affects only retail investors, but recent studies by BenRephael, Da, and Israelsen (2017) and Schmidt (2019) show that institutional investors are also subject to inattention, and examine the link between limited attention and returns around earnings announceme”