We present a model of investing based on environmental, social, and governance (ESG) criteria. In equilibrium, green assets have negative CAPM alphas, whereas brown assets have positive alphas. Green assets’ negative alphas stem from investors’ preference for green holdings and from green stocks’ ability to hedge climate risk. Green assets can nevertheless outperform brown ones during good performance of the ESG factor, which captures shifts in customers’ tastes for green products and investors’ tastes for green holdings. The latter tastes produce positive social impact by making rms greener and shifting real investment from brown to green rms. The ESG investment industry is at its largest, and the alphas of ESG-motivated investors are at their lowest, when there is large dispersion in investors’ ESG preferences.

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