By: Benjamin Hübel, Friedrich-Alexander-Universität Erlangen-Nürnberg (FAU)
Sustainability is increasingly moving into the focus of social debates. A new article describes possibilities how to quantify and to manage resulting risks and opportunities for investments in financial markets.
Would you pay more for a pack of coffee if it had a fair trade label? Would you consider renewable energies if you changed your electricity supplier? Would you prefer an electric drive to a diesel engine when buying a new car? More and more people tend to answer “yes” to these kind of questions. Such changes in consumer behavior, accompanied by regulatory measures, have put pressure on companies to adapt sustainable business practices.
To finance these changes, policymakers increasingly rely on directing private capital flows toward sustainable investments. For example, the European Parliament recently adopted a directive aimed at putting sustainability aspects “at the heart of the financial system”. These developments raise the question of whether stock prices reflect the social responsibility of firms. This article shows how to extract sustainability information from equity returns and how investors can use this information to manage their portfolios.