When Green Investors Are Green Consumers

Abstract

We introduce investors with preferences for green assets to a general equilibrium setting in which they also prefer consuming green goods. Their preference for green goods induces consumption premia on expected returns, which counterbalance the green premium stemming from their preferences for green assets. Because they provide a hedge when green goods become expensive, brown assets command lower consumption premia, while green investors allocate a larger share of their portfolios towards them. Empirically, the green-minus-brown consumption premia differential reached 30-40 basis points annually, and con- tributes to explaining the limited impact of green investing on the cost of capital of polluting firms.

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

JEL Classification: G11, G12