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 proportion of green investors and their sensitivity to climate externalities increase. We show that the impact of green investors primarily governs companies' long-term 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. We provide empirical evidence supporting our results by focusing on United States stocks between 2004 and 2018 and using green fund holdings as a proxy for green investors' beliefs. When the fraction of assets managed by green investors doubles, companies’ carbon intensity drops by 4.9% over one year; when climate uncertainty doubles, companies’ carbon intensity increases by 6.7% the following year.

Keywords: Environmental finance, socially responsible investing, ESG, impact investing

JEL Classification: G12, G11