Bachelier's Market Model for ESG Asset Pricing

TL;DR

This paper extends Bachelier's market model to include ESG scores, allowing for the valuation of options on ESG assets by integrating ESG factors into the classical financial framework.

Contribution

It introduces a novel extension of Bachelier's model that incorporates ESG scores into asset pricing and option valuation.

Findings

Model successfully integrates ESG scores into asset pricing.

Enables valuation of options on ESG assets.

Provides a framework for ESG-related financial derivatives.

Abstract

Environmental, Social, and Governance (ESG) finance is a cornerstone of modern finance and investment, as it changes the classical return-risk view of investment by incorporating an additional dimension of investment performance: the ESG score of the investment. We define the ESG price process and integrate it into an extension of Bachelier's market model in both discrete and continuous time, enabling option pricing valuation.