Socially Optimal Sustainability Standards with Non-Consequentialist ("Warm Glow") Investors

26 Pages Posted: 28 Mar 2022

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: February 15, 2022

Abstract

Agencies around the world are in the process of developing taxonomies and standards for sustainable (or ESG) investment products. A key assumption in our model is that of non-consequentialist private investors (households) who derive a "warm glow" decisional utility when purchasing an investment product that is labelled as sustainable. We ask when such labelling is socially beneficial even when the social planner can impose a minimum standard on investment and production. In a model of financial constraints (Holmström and Tirole 1997), which we close to include consumer surplus, we also determine the optimal labelling threshold and show how its stringency is affected by determinants such as the prevalence of warm-glow investor preferences, the presence of social network effects, or the relevance of financial constraints at the industry level.

Keywords: Sustainability, ESG, green financing, labelling

Suggested Citation

Inderst, Roman and Opp, Marcus M., Socially Optimal Sustainability Standards with Non-Consequentialist ("Warm Glow") Investors (February 15, 2022). Available at SSRN: https://ssrn.com/abstract=4049090 or http://dx.doi.org/10.2139/ssrn.4049090

Roman Inderst (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
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HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Marcus M. Opp

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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