Abstract
We propose a theory in which each stock's environmental, social, and governance (ESG) score plays two roles: (1) providing information about firm fundamentals and (2) affecting investor preferences. The solution to the investor's portfolio problem is characterized by an ESG-efficient frontier, showing the highest attainable Sharpe ratio for each ESG level. The corresponding portfolios satisfy four-fund separation. Equilibrium asset prices are determined by an ESG-adjusted capital asset pricing model, showing when ESG raises or lowers the required return. Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing. Finally, we test our theory's predictions using proxies for E (carbon emissions), S, G, and overall ESG.
Original language | English |
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Journal | Journal of Financial Economics |
Volume | 142 |
Issue number | 2 |
Pages (from-to) | 572-597 |
Number of pages | 26 |
ISSN | 0304-405X |
DOIs | |
Publication status | Published - Nov 2021 |
Bibliographical note
Published online: 9 November 2020.Keywords
- Portfolio choice
- ESG
- Socially responsible investing
- Impact investing
- Sustainable investing
- CSR
- Carbon
- Governance