A goal of environmental, governance and sustainable (ESG) investing is to reduce carbon emissions and improve the quality of the environment. New research shows this effort is succeeding.
From 2014 to 2018, sustainable investments grew from 18% to 26% of assets under management in the U.S., reaching a total of $12 trillion. Over the same period, the average carbon intensity of Nasdaq, AMEX and NYSE companies decreased about 30%. The downward trend in corporate greenhouse gas emissions may be partly due to the pressure exerted by green investors who strive to underweight, or exclude from their investments, the most carbon-intensive companies, thereby increasing their cost of capital.
Tiziano De Angelis, Peter Tankov and David Zerbib contribute to the literature on ESG investing with their April 2020 study, “Environmental Impact Investing.” They examined whether green investing pushes companies to reduce their greenhouse gas emissions and, if so, what factors lead companies to adjust their emissions. Their database covered 348 “green” funds investing in U.S. equities as of December 2018 and their holdings over the period 2007 through 2018.
Following is a summary of their findings:
- The environmental priorities of green investors push companies to reduce their greenhouse gas emissions by raising their cost of capital. Companies are more inclined to do so if their abatement costs are low and the proportion and stringency of green investors is high. For example, because they internalize large negative externalities for the coal industry, green investors induced a 1.73% annual increase in return on the coal industry compared to utilities. This finding is consistent with prior research showing that the stock returns of the most-polluting companies are increased by a positive premium.
- By internalizing the impact of green investors on their financial valuation, companies are incentivized to pay a cost to mitigate their emissions by adopting less carbon-intensive technologies to lower their cost of capital. For example, when the proportion of green investments doubles from 25% to 50%, the carbon intensity falls by 5% over a one-year horizon.
