The Environmental and Macroeconomic Effects of Socially Responsible Investment

We analyze the effects of socially responsible investment and public abatement on environmental quality and the economy in a continuous-time dynamic growth model featuring optimizing households and firms. Environmental quality is modelled as a renewable resource. Consumers can invest in government bonds or firm equity. Since investors feel partly responsible for environmental pollution when holding firm equity, they require a premium on the return to equity. We show that socially responsible investment behaviour by households partially offsets the positive effects on environmental quality of public abatement policies.