Sustainability is remunerated as a characteristic with intrinsic value, over and above risk. The value associated with sustainability is typically inferred from the average returns of portfolios tilted toward sustainable assets, with some hedge to make them risk-neutral. 

Yet, if the sustainability of assets is not proportional to their risk, the common procedures used to construct these portfolios end up altering the portfolio’s actual sustainability – an effect that is usually ignored and leads to a mismeasurement of the return spread attributed to sustainability.

This brief presents a method that is robust to this issue, by measuring the spread directly while leveraging the commonalities across stocks to identify risk factors. 

As shown in Franceschini (2024), the approach unfolds in two steps: (1) identifying common factors to treat as risk factors, and (2) embedding the equilibrium conditions derived from a simple theoretical model directly in the Generalized Method of Moments estimator.