On the relationship between green preferences and returns

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.