Environmental Impact Investing

Abstract

This paper shows how green investing spurs companies to reduce their greenhouse gas emissions by raising their cost of capital. Companies' emissions decrease when the proportion of green investors and their environmental stringency increase. However, heightened uncertainty regarding future environmental impacts alleviates the pressure on the cost of capital for the most carbon-intensive companies and pushes them to increase their emissions. We provide empirical evidence supporting our results by focusing on United States stocks and using green fund holdings to proxy for green investors' beliefs. When the fraction of assets managed by green investors doubles, companies' carbon intensity drops by 5% per year.

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

JEL Classification: G12, G11