Welfare Consequences of Sustainable Finance

49 Pages Posted: 17 Mar 2021 Last revised: 13 Sep 2021

See all articles by Harrison G. Hong

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Jinqiang Yang

Columbia University; Shanghai University of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 12, 2021

Abstract

Asset managers face increasing pressure to only hold firms that meet net-zero carbon emissions targets. We model how these mandates incentivize firms to address the global-warming externality through investments in decarbonization capital. A firm that invests receives a lower cost of capital by an amount equal to its investments divided by its Tobin's q. The limiting case of a mandate that restricts all wealth is a capital tax that funds a higher decarbonization-to-productive capital ratio. Due to adjustment costs, this ratio rises gradually---as does the cost-of-capital wedge---until the steady state. Our model matches macro-finance moments, stock-demand elasticity, and climate-mitigation pathways. The welfare-maximizing mandate with markets approximates the planner's first-best solution.

Keywords: Sustainable Investing, ESG, Welfare, Externalities, Mitigation, Climate Change, Risk Premia, Interest Rates, Cost of Capital, Capital Accumulation, Disasters

JEL Classification: G30, G12, E20, H50

Suggested Citation

Hong, Harrison G. and Wang, Neng and Yang, Jinqiang, Welfare Consequences of Sustainable Finance (September 12, 2021). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3805189 or http://dx.doi.org/10.2139/ssrn.3805189

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Neng Wang

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Jinqiang Yang

Columbia University ( email )

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Shanghai University of Finance and Economics ( email )

Law School, 777 Guoding Road, Yangpu District
Shanghai, AK 200433
China

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