Modeling the economic and environmental effects of ESG preferences: A general equilibrium approach

This study develops a multi-sector Dynamic Stochastic General Equilibrium (DSGE) model encompassing households, intermediate goods producers (brown and green firms), final goods producers, a central bank, and a central government. It systematically examines the dynamic transmission mechanisms through which ESG preferences influence firm-level input-output relationships and carbon emissions. The model incorporates three innovative elements: the disutility of carbon emissions on social welfare, explicit differentiation of transmission pathways between brown and green firms, and reconceptualized firm-level ESG incentives. Simulation analyses of four distinct shocks—household green investment preference, brown firm collateral ratio, emission reduction effort, and emission tax—reveal several key dynamics. Notably, while increased household green investment preference leads to a short-term decline in brown firms’ brown investment, such investment gradually recovers in the long term, and emission stocks still see a reduction. Although heightened market expectations regarding brown firms’ ESG performance can boost their output, they may weaken their motivation to reduce emissions and exacerbate pollution. Meanwhile, while enhanced emission reduction efforts improve the environment in the short term, they exert a sustained dampening effect on investment in green firms. Furthermore, emission tax increases yield long-term benefits for green firms and the environment, despite exerting persistent negative impacts on brown firms. This research establishes a dynamic analytical framework for assessing the economic and environmental impacts of ESG investment, providing significant theoretical insights for advancing sustainable finance and optimizing emission reduction policies.