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  5. Corporate Finance: ESG - Theory
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Corporate Finance: ESG - Theory

Paper Session

Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Napoleon A
Hosted By: American Finance Association
  • Chair: Martin Oehmke, London School of Economics

Emission Caps and Investment in Green Technologies

Bruno Biais
,
HEC Paris
Augustin Landier
,
HEC Paris

Abstract

As firms don't internalise the negative externalities of their CO2
emissions, emission caps are needed to curb global warming. We study the
equilibrium interaction between firms, which can invest in green
technologies, and a government, which can impose\ emission caps but has
limited commitment power. Two types of equilibria can arise: If firms
anticipate caps, they invest in green technologies. These investments have
positive spillover effects, lowering the aggregate cost of emission
reductions for all firms, thus making the government willing to cap
emissions. If firms anticipate no caps, they don't invest in green
technologies, and the government finds it too costly to cap emissions. A
large environmentally responsible fund, engaging with firms' management to
foster investment in green technologies, can tilt towards the equilibrium
with emission caps.

Socially Responsible Divestment

Alex Edmans
,
London Business School
Doron Levit
,
University of Washington
Jan Schneemeier
,
Indiana University

Abstract

Blanket exclusion of “brown” stocks is seen as the best way to reduce their negative externalities by starving them of capital. We show that a more effective strategy may be tilting – holding a brown stock if the firm has taken a corrective action. While such holdings allow the firm to expand, they also encourage the action. We derive conditions under which tilting dominates exclusion for externality reduction. If the action is not publicly observable, the investor might not tilt even if she can gather private information on the action – tilting would lead to accusations of greenwashing. The presence of an arbitrageur who buys underpriced stocks increases the relative effectiveness of tilting. A responsible investor who is partially profit-motivated may be more likely to tilt than one whose sole objective is minimizing externalities.

The Pace of Change: Socially Responsible Investing in Private Markets

Deeksha Gupta
,
Carnegie Mellon University
Alexandr Kopytov
,
University of Hong Kong
Jan Starmans
,
Stockholm School of Economics

Abstract

We study the pace at which socially responsible investors generate impact in private capital markets. Investors with broad pro-social preferences care about firm externalities independent of their ownership in the firm and hence value acquiring firms with high negative production externalities because they can reform these firms. The anticipation of trading gains for firms with high negative externalities decreases the incentive of current firm owners to reduce these externalities proactively, potentially causing delay in reform. Investment mandates through which investors can commit to paying a premium for firms with low negative externalities can incentivize reform in a timely manner.

Discussant(s)
Marcus Opp
,
Stockholm School of Economics
Edward Van Wesep
,
University of Colorado Boulder
Hongda Zhong
,
London School of Economics
JEL Classifications
  • G3 - Corporate Finance and Governance