Sustainable Investing in Equilibrium

Lubos Pastor, Robert Stambaugh, Lucian Taylor

2023 | Academic | Sustainable Investing

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.