Abstract: I study how sustainable investing impacts cross-sectional equity prices and valuation with institutional investors’ heterogeneous demand and tastes internationally. To obtain a sustainability measure for companies around the world and to capture the ESG tilt in portfolios of institutional investors, I construct a reveal-preference sustainability measure for each firm instead of using a third-party ESG score. With Factset international institutional holding data from 2010 to 2021, I apply an equilibrium asset pricing framework to empirically estimate heterogeneous preference, allowing for investment portfolio choices within and across countries. I find that separately estimated investor demands are sensitive to the sustainability of firms. The demand of investors on average increases by 26% following a one standard deviation increase in the perceived greenness, but there exists huge investor heterogeneity across countries; for example, investors from mainland China would decrease their demand by 21%. With the estimated coefficients, I conduct counterfactual analyses that consider the implications when the ESG coefficient increases following realized climate risk and when a subset of ESG investors switch to holding a market-weighted portfolio to understand the significance of different groups of institutional investors.
Discussant: Jan Schneemeier, Michigan State University
Abstract: This paper develops a quantifiable dynamic general equilibrium model to uncover the roles of green finance on emissions reduction, production, innovation, and growth under scenarios with and without optimal carbon pricing. I model green finance as either green capital cost intervention that confers a cost advantage to green capital, or green innovation intervention that channels resources to foster green technology innovation. Quantitative results indicate that carbon pricing yields larger cuts in emission levels and intensities than green capital cost intervention, a finding consistent with reduced-form DiD event studies on a global sample of firms. To bridge the gap between the two in reducing emissions, the cost advantage for green capital needs to increase substantially. In optimal scenarios where carbon can be priced optimally, green finance is preferable to carbon pricing only in the presence of a strong innovation externality. Mapping model to data where carbon is underpriced, green finance complements carbon pricing in emissions reduction and achieving higher welfare gains. Additionally, advancements in green technology innovation can amplify the effectiveness of a carbon border adjustment mechanism.
Discussant: Adelina Barbalau, HEC Paris and University of Alberta
Abstract: Using comprehensive data on U.S. power plant emissions and generation from 2004 to 2020, I
explore the environmental outcomes of the transfer of power plant control. Following the transaction, plants located in the non-competitive market experienced worse environmental performance. Results suggest that firms divest pollutive assets to entities facing less environmental pressure, leading to worsened environmental
performance. On the other hand, plants located in the competitive market have seen no worsening,
and sometimes even improved, environmental performance. The results are sustained
when I examine transactions between different ownership types, specifically incumbent regulated
utility (RU) and independent power producers (IPP). I propose a demand-side mechanism
to explain the findings: power users’ demand for clean energy motivates all power producers to
prioritize their environmental footprint, leading to no worse environmental performance following
asset divestitures.
Discussant: Qiping Xu, University of Illinois-Urbana-Champaign
