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

66 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, defined as a firm's change in environmental impact due to a change in its cost of capital. We show empirically that a reduction in financing costs for firms that are already green leads to small improvements in impact at best. In contrast, increasing financing costs for brown firms leads to large negative changes in firm impact. Thus, sustainable investing that directs capital away from brown firms and toward green firms may be counterproductive, in that it makes brown firms more brown without making green firms more green. We further show that brown firms face very weak financial incentives to become more green. Due to a mistaken focus on percentage reductions in emissions, the sustainable investing movement primarily rewards green firms for economically trivial reductions in their already low levels of emissions.

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

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