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Welfare Consequences of Sustainable Finance

Author

Listed:
  • Harrison Hong
  • Neng Wang
  • Jinqiang Yang
  • Stefano Giglio

Abstract

We model the welfare consequences of mandates that restrict investors to hold firms with net-zero carbon emissions. To qualify for these mandates, value-maximizing firms have to accumulate decarbonization capital. Qualification lowers a firm’s required return by its decarbonization investments divided by Tobin’s q, that is, the greenium or the dividend yield shareholders forgo to address the global-warming externality. The welfare-maximizing mandate approximates the first-best solution, yielding welfare gains compared to laissez-faire by mitigating the weather disaster risks resulting from carbon emissions. Our model generates optimal transition paths for decarbonization that we use to evaluate proposed net-zero targets.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Suggested Citation

  • Harrison Hong & Neng Wang & Jinqiang Yang & Stefano Giglio, 2023. "Welfare Consequences of Sustainable Finance," The Review of Financial Studies, Society for Financial Studies, vol. 36(12), pages 4864-4918.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:12:p:4864-4918.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad048
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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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