Investor tastes for sustainability can move prices without moving expected returns. We develop an asset pricing framework in which fundamental investors can span any desired exposure to financial risk while holding zero exposure to non-pecuniary tastes. In the equilibrium, taste-driven demand creates systematic return comovement, but systematic taste exposure commands no risk premium; noise traders supply the liquidity that allows markets to clear without pricing taste risk. Empirically, we construct three taste factors from United Nations Sustainable Development Goal indicators, Sustainability and Climate Resiliency, Human Development and Social Inclusion, and Institutional Strength and Innovation Capacity, and estimate exposures for 36,077 firms in 45 countries. The factors load significantly on the latent factor space yet earn zero premia in cross-sectional tests. Removing taste exposure from conventional factors raises the out-of-sample squared Sharpe ratio of the five-factor model by about 20 percent, with gains concentrated when arbitrage constraints bind, when sustainability is salient, or when taste investors’ wealth share is high. Our framework delineates the conditions under which tastes create systematic yet unpriced risks, reconciling evidence on ESG investment flows with the absence of taste risk premia.
