Engineering

Efficient frontier

Stock (firearms)

Capital asset pricing model

Microeconomics

Computer security

Portfolio

Archaeology

Economics

Computer science

Asset (computer security)

Business

Corporate governance

Mechanical engineering

Frontier

Geography

Econometrics

Sharpe ratio

Financial economics

Finance

History

Journal of Financial Economics

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.

Responsible investing: The ESG-efficient frontier