N°23-56: Modelling Sustainable Investing in the CAPM

Empirical studies investigate various causes and effects of sustainable investments. While some attempts have been made to describe the results found by theoretical models, these are relatively complex and idiosyncratic. We relate to existing studies and use a parsimonious CAPM in which we model various aspects of sustainable investing. Our results find evidence that ESG-harmful investments require higher returns and ESG rating heterogeneity increases returns. Moreover, sustainable investing changes a firm’s production decision through two channels—the growth and the reform channel.