The Effect of Green Investment on Corporate Behavior

According to equilibrium models with heterogeneous tastes for ESG investments, green assets are expected to generate lower returns in the long run compared to non-ESG counterparts.

“Through the lens of equilibrium models of agents with heterogeneous tastes for ESG investments, green assets are expected to generate lower returns in the long run compared to their non-ESG counterparts.”

Avramov, Cheng et al. (2021), Fama and French (2007), Heinkel et al. (2001), and Berk and van Binsbergen (2021) obtain a negative ESG-expected return relationship in a one-period equilibrium model.

“For instance, Avramov, Cheng et al. (2021), Fama and French (2007), Heinkel et al. (2001), and Berk and van Binsbergen (2021) obtain a negative ESG-expected return relationship in a one-period equilibrium model.”

Early studies of sustainable investing attribute the higher cost of capital of brown firms relative to green ones to the reduction in risk-sharing ensuing from exclusionary screening.

“They attribute the higher cost of capital of brown firms relative to green ones to the reduction in risk-sharing ensuing from such screening (Heinkel et al., 2001).”

Theoretical models typically treat green assets as consumption goods to incorporate investor preferences for sustainable investing.

“To incorporate investor preferences for sustainable investing, theoretical models typically treat green assets as consumption goods”

In Heinkel et al. (2001), the presence of exclusionary green investors changes the risk sharing opportunities in the market.

“That is the modeling choice offered in Heinkel et al. (2001), where the presence of exclusionary green investors changes the risk sharing opportunities in the market.”

Another form of risk management would be to avoid problematic firms.

“Another form of risk management would be to avoid problematic firms as pointed out theoretically by Heinkel, Kraus, and Zechner (2001) and empirically tested by Fernando, Sharfman, and Uysal (2017).”