Climate Capitalists

Abstract

Climate capitalists invest in green firms in order to lower these firms' cost of capital and thereby stimulate green investments. This "green investing" channel only works if green firms actually reduce their perceived cost of capital and discount rates in response to green investing. Using data from Gormsen and Huber (2022), we find that the average difference in the perceived cost of capital between the greenest and the brownest firms was close to zero before 2016 but has fallen to -2.6 percentage points in the years since 2016, concurrent with the rise of green investing. Similarly, the difference in discount rates was small before 2016 and has fallen to -5.8 percentage points since 2016. In a simple stylized model, the observed differences in discount rates are large enough to reduce firm-level emissions by 20 percent. We survey corporate managers to study how firms incorporate greenness into their discount rates. Overall, the results are consistent with an important role for climate capitalists in stimulating climate-friendly production.

Keywords: Cost of capital, discount rates, ESG investing, green investing, sustainable investing