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Sustainable Investing in Imperfect Markets

Thorsten Hens and Ester Trutwin
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Thorsten Hens: University of Zurich; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute
Ester Trutwin: University of Zurich; Swiss Finance Institute

No 23-83, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper analyses sustainable investing in terms of impact and ESG investing. Using a parsimonious general equilibrium model, we integrate the different effects of sustainable investing into welfare analysis. Given that the price for polluting the environment is too low, we show that impact investing can lead to a second-best solution. If at the margin the technology is ”clean” investment should be increased while a capital reduction is appropriate if at the margin the firm’s technology is ”dirty”. However, sustainable investing requires households to anticipate the firm’s pollution activity. Therefore we show how the same solution can be implemented with ESG investing in which the burden of knowledge lies on the rating agency. Finally, we indicate that the first-best solution can be achieved by sustainable consumption.

Keywords: Impact Investing; ESG Investing; Sustainable Consumption; Environmental Kuznets Curve (search for similar items in EconPapers)
JEL-codes: D10 D50 D53 G41 Q50 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2023-09
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
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