Dynamic ESG Equilibrium

Author: Doron Avramov, Abraham Lioui, Yang Liu, Andrea Tarelli

This paper develops and applies an equilibrium model that accounts for ESG demand and supply dynamics. In equilibrium, ESG preference shocks represent a novel risk source characterized by diminishing marginal utility and positive premium. Expected green asset returns are negatively associated with time-varying convenience yield, while exposures to ESG preference shocks lead to positive green premia. Augmenting these conflicting forces with positive contemporaneous effects of preference shocks on realized returns, the green-minus-brown portfolio delivers large positive payoffs for reasonably long horizons. Nonpecuniary benefits from ESG investing account for a nontrivial and increasing fraction of total consumption.

Avramov, Doron and Lioui, Abraham and Liu, Yang and Tarelli, Andrea, Dynamic ESG Equilibrium (October 3, 2021). Available at SSRN: https://ssrn.com/abstract=3935174 or http://dx.doi.org/10.2139/ssrn.3935174
Source: https://papers.ssrn.com/sol3/papers.cfm?abstr...

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