Climate Impact Investing

Abstract

This paper shows how green investing spurs companies to mitigate their carbon emissions by raising the cost of capital of the most carbon-intensive companies. Companies’ emissions decrease when the wealth share of green investors and their sensitivity to climate externalities increase. We show that the impact of green investors primarily governs companies’ long-run emissions. Companies are further incentivized to reduce their emissions when green investors anticipate tighter climate regulations and climate-related technological innovations. However, heightened uncertainty regarding future climate risks alleviates green investors’ pressure on the cost of capital of companies and pushes them to increase their emissions. Calibrated on U.S. data, our model suggests that, albeit effective, the impact of green investors remains limited given their current wealth share and practices. This paper was accepted by George Serafeim, special issue of Management Science: business and climate change.