Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms

69 Pages Posted: 17 Feb 2023 Last revised: 4 Dec 2023

See all articles by Samuel M. Hartzmark

Samuel M. Hartzmark

Boston College - Carroll School of Management

Kelly Shue

Yale School of Management; National Bureau of Economic Research (NBER)

Date Written: November 1, 2022

Abstract

We develop a new measure of impact elasticity: the change in a firm’s environmental impact due to a change in its cost of capital. We find that reducing green firms’ financing costs leads to minimal impact changes, while increasing brown firms’ financing costs causes significant negative impact changes. Thus, sustainable investing strategies that shift capital from brown to green firms contain a counterproductive channel that makes brown firms more brown without making green firms more green. A mistaken focus on \textit{percentage} reductions in emissions rewards already-green firms for trivial reductions in emissions and gives brown firms weak incentives to improve.

Keywords: sustainable investing, ESG, cost of capital, impact elasticity, proportional thinking

JEL Classification: G11, G32, G02

Suggested Citation

Hartzmark, Samuel M. and Shue, Kelly, Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms (November 1, 2022). Available at SSRN: https://ssrn.com/abstract=4359282 or http://dx.doi.org/10.2139/ssrn.4359282

Samuel M. Hartzmark

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Kelly Shue (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
12,612
Abstract Views
40,129
Rank
736
PlumX Metrics