Climate Capitalists

32 Pages Posted: 4 Mar 2023 Last revised: 17 May 2024

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Kilian Huber

University of Chicago - Booth School of Business

Sangmin Oh

University of Chicago - Booth School of Business; University of Chicago - Department of Economics

Date Written: February 22, 2023

Abstract

Sustainable investors (SI) aim to stimulate corporate investment in green projects by reducing the cost of green capital. We assess whether SI influence firms investment decisions by studying firms perceptions of their cost of capital. Green firms have historically perceived their cost of capital to be the same as brown firms, but since the rise of the SI movement, green firms have perceived a substantially lower cost of capital than brown firms. As of 2023, the average green firm perceive a 1.2 percentage points lower cost of capital than the average brown firm. Large energy and utility firms perceive a 1 percentage point lower cost of capital on their green projects (renewable energy) relative to their brown projects (fossil fuels), and require on average four percentage point lower returns on their green projects than brown projects. These patterns stimulate more green investment by firms. We relate firms’ pledged CO2 reductions to cost of capital perceptions, and find that a one percentage point spread in green and brown cost of capital leads to a 10 percentage points reduction in CO2. Overall, the results support the view that the recent rise in green investment has a positive impact on reducing future CO2.

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

Suggested Citation

Gormsen, Niels Joachim and Huber, Kilian and Oh, Sangmin, Climate Capitalists (February 22, 2023). Available at SSRN: https://ssrn.com/abstract=4366445 or http://dx.doi.org/10.2139/ssrn.4366445

Niels Joachim Gormsen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Kilian Huber

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Sangmin Oh

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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