When Green Investors Are Green Consumers

Abstract

We bring investors with preferences for green assets to a general equilibrium setting in which they also prefer consuming green goods. Their preferences for green goods induce consumption premia on expected returns that counterbalance the green premium stemming from their preferences for green assets. Because they provide green investors with a financial hedge when green goods become expensive, brown assets command lower consumption premia on average, and green investors allocate a larger share of their wealth towards them. Empirically, the average difference in consumption premia between green and brown assets gradually increased to reach 30 to 40 basis points per year and contributes to explaining the limited impact of green investing on polluting firms’ costs of capital.

Keywords: Sustainable Finance, Environmental Finance, Asset Pricing, Portfolio Choice

JEL Classification: G11, G12