A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion

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Abstract

I demonstrate how sustainable investing through exclusionary screening and environmental, social and governance (ESG) integration affects asset returns. I develop an asset pricing model with partial segmentation and disagreement among investors. I characterize two exclusion premia generalizing Merton's (1987) premium on neglected stocks and a taste premium that disentangles the link between ESG and financial performance. By constructing an instrument that captures sustainable investors' tastes for green firms, I estimate this model applied to green investing and sin stock exclusion using U.S. data between 2000 and 2018. The model outperforms the four-factor model, and yields a taste and an exclusion effect of 1.5% and 2.5% per year, respectively.
Original languageEnglish
PublisherSSRN
Number of pages130
Publication statusPublished - 20 Sep 2019

Keywords

  • sustainable finance
  • environmental finance
  • behavioral finance
  • ESG
  • tastes
  • sin stocks
  • segmentation

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