Modelling Sustainable Investing in the CAPM

The Business Financing and Banking Research Group invite you to lunch and learn seminar presented by Professor Thorsten Hens.

Abstract

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 heterogeneous. We relate to existing studies and use a parsimonious Capital Asset Pricing Model (CAPM) in which we model different aspects of sustainable investing. The basic reasoning of the CAPM, that investors need to be compensated for the bad aspects of assets applies so that investors demand higher returns for investments that are harmful from an environmental, social, or governance (ESG) perspective. Moreover, if investors have heterogeneous views on the ESG–characteristics of a company, the market requires higher returns for that company, provided richer investors care more about ESG than poorer investors, which is known as the Environmental Kuznets Curve (EKC). Besides the effect on asset prices, we find that sustainable investing has an impact on a firm’s production decision through two channels – the growth and the reform channel. Sustainable investment reduces the size of dirty firms through the growth channel and makes firms cleaner through the reform channel. We illustrate the magnitude of these effects with numerical examples calibrated to real-world data, providing a clear indication of the high economic relevance of the effects.

Presented by

Thorsten Hens is a Swiss Finance Institute Professor of Financial Economics at the University of Zurich and Adjunct Professor of Finance at University of Lucerne, Switzerland as well as at the Norwegian School of Economics, NHH, in Bergen. He studied at Bonn and Paris and previously was professor in Bielefeld and taught at Stanford University. His main research areas are behavioural finance with applications to wealth management and evolutionary finance with applications to asset management. Thorsten Hens has published more than eighty peer-reviewed journal articles, and is the co-author of more than ten books. Moreover, he is one of the founders of the UZH-HSG-Spin Off Company Behavioral Finance Solutions, the Swiss Fintec Innovations Association and the UZH Blockchain Center. Thorsten Hens holds mandates in pension funds, insurance companies and banks and he is a regular speaker at practitioner conferences.