Sustainable Investing and Public Goods Provision

The rise of sustainable investing comes coupled with the question of what impact it has. We assume that firms can contribute to the public good, e.g., by reducing carbon emissions, and investors may take into account the amount of public good that firms produce when making their investment allocation. In an equilibrium asset pricing model with production and public good provision, we find that environmentally conscious investors invest more than others, invest more in clean firms, and may invest more in dirty firms. Whether investors pay a premium for clean firms depends on the amount of systematic risk the firm has. There is underprovision of the public good in equilibrium and government provision will crowd out private provision, possibly to the point of reducing overall public good provision