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On the relationship between green preferences and returns

Klynning, Ella LU and Frick, Cornelia LU (2020) NEKH02 20192
Department of Economics
Abstract
Abstract
The care for the environment in investment situations is rising among different groups of investors, due to social and psychological factors. Existing studies on nonpecuniary preferences for the environment are focused on measuring the proportion of individuals with green agendas, whereas we focus on measuring also magnitudes, i.e. how much future wealth are people actually prepared to give up for making a greener investment? Inspired by behavioural finance, we have derived an economic experimental survey to allocate nonpecuniary preferences and thus, the input variables of an extension of CAPM. Using the extension of CAPM that includes environmental preferences and further develop the traditional CAPM assumptions per the... (More)
Abstract
The care for the environment in investment situations is rising among different groups of investors, due to social and psychological factors. Existing studies on nonpecuniary preferences for the environment are focused on measuring the proportion of individuals with green agendas, whereas we focus on measuring also magnitudes, i.e. how much future wealth are people actually prepared to give up for making a greener investment? Inspired by behavioural finance, we have derived an economic experimental survey to allocate nonpecuniary preferences and thus, the input variables of an extension of CAPM. Using the extension of CAPM that includes environmental preferences and further develop the traditional CAPM assumptions per the addition of the variables e, a1 and a2, we find the linear relationship between green performance of an asset and return. The linear relationship between environmental performance of an asset and return is displayed through the slope: -0.368. Despite the negative relationship, the results show that in 44.6 % of cases, a nonpecuniary preference for the environment is present. The aggregated return, exchanged for a higher environmental score, enumerates to 1.19 percentage points. Our main contribution is that this is the first study to translate survey responses into exactly how the cost of capital for a company is related to its environmental performance. (Less)
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author
Klynning, Ella LU and Frick, Cornelia LU
supervisor
organization
course
NEKH02 20192
year
type
M2 - Bachelor Degree
subject
keywords
Green investing, Behavioural finance, Capital asset pricing model, Investor preference, Nonpecuniary preference
language
English
id
9002663
date added to LUP
2020-02-25 10:59:31
date last changed
2020-02-25 10:59:31
@misc{9002663,
  abstract     = {{Abstract
The care for the environment in investment situations is rising among different groups of investors, due to social and psychological factors. Existing studies on nonpecuniary preferences for the environment are focused on measuring the proportion of individuals with green agendas, whereas we focus on measuring also magnitudes, i.e. how much future wealth are people actually prepared to give up for making a greener investment? Inspired by behavioural finance, we have derived an economic experimental survey to allocate nonpecuniary preferences and thus, the input variables of an extension of CAPM. Using the extension of CAPM that includes environmental preferences and further develop the traditional CAPM assumptions per the addition of the variables e, a1 and a2, we find the linear relationship between green performance of an asset and return. The linear relationship between environmental performance of an asset and return is displayed through the slope: -0.368. Despite the negative relationship, the results show that in 44.6 % of cases, a nonpecuniary preference for the environment is present. The aggregated return, exchanged for a higher environmental score, enumerates to 1.19 percentage points. Our main contribution is that this is the first study to translate survey responses into exactly how the cost of capital for a company is related to its environmental performance.}},
  author       = {{Klynning, Ella and Frick, Cornelia}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{On the relationship between green preferences and returns}},
  year         = {{2020}},
}