A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Environmental Integration and Sin Stock Exclusion*

This article shows how sustainable investing-through the joint practice of exclusionary screening and environmental, social, and governance (ESG) integration-affects asset returns. I develop an asset pricing model with partial segmentation and heterogeneous preferences. I characterize two exclusion premia generalizing premium on neglected stocks and a taste premium that clarifies the relationship between ESG and financial performance. Focusing on US stocks, I estimate the model by applying it to sin stocks as excluded assets and using the holdings of green funds to proxy for environmental integration. The average annual exclusion effect is 2.79% for the period 1999-2019. Although the annual taste effect ranges from -1.12% to + 0.14% across industries for 2007-19, the taste effect spread between the top and bottom terciles of companies within each industry can exceed 2% per year. Finally, I estimate and explain the dynamics of these premia.

Automated summary

This article examines the impact of sustainable investing on asset returns through exclusionary screening and ESG integration. The findings suggest that the exclusion effect has a positive influence on asset returns, while the taste effect varies significantly across industries and companies.