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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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    Citations

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    Cited by:

    1. Lai, Fujun & Cheng, Xianli & Li, An & Xiong, Deping & Li, Yunzhong, 2025. "Does flood risk affect the implied cost of equity capital?," Finance Research Letters, Elsevier, vol. 71(C).
    2. Boungou, Whelsy & Dufau, Bastien, 2025. "Shareholder wealth effects of corporate sustainability reporting regulations," Finance Research Letters, Elsevier, vol. 80(C).
    3. Berle, Erika & He, Wanwei (Angela) & Ødegaard, Bernt Arne, 2025. "The stock market and corporate consequences of ethical exclusions by the world’s largest fund," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 102(C).
    4. Dangl, Thomas & Halling, Michael & Yu, Jin & Zechner, Josef, 2025. "Social preferences and corporate investment," Journal of Financial Economics, Elsevier, vol. 172(C).
    5. Chen, Luoye & Li, Tao & Zhang, Yi, 2025. "Municipal Finance and Biodiversity Conservation," 2025 AAEA & WAEA Joint Annual Meeting, July 27-29, 2025, Denver, CO 360756, Agricultural and Applied Economics Association.
    6. Michael Barnett, 2024. "A Run on Fossil Fuel? Climate Change and Transition Risk," Papers 2410.00902, arXiv.org.
    7. Wang, Zhongli & Nishihara, Michi, 2025. "Investment and information asymmetry in corporate sustainability: Incentive-auditing contracts and policy insights," International Review of Financial Analysis, Elsevier, vol. 105(C).
    8. Meng, Weizhen & Li, Shilin & Yang, Jinqiang, 2024. "Mitigating disaster risks caused by carbon emissions," Economics Letters, Elsevier, vol. 241(C).
    9. Kiril Simeonovski & Igor Sazdovski & Filip Fidanoski, 2025. "Sustainable Finance," Post-Print hal-04964117, HAL.
    10. Niu, Yingjie & Yang, Jinqiang & Zou, Zhentao, 2024. "Disaster learning and aggregate investment," Journal of Economic Theory, Elsevier, vol. 220(C).
    11. Döttling, Robin & Rola-Janicka, Magdalena, 2025. "Too Levered for Pigou: Carbon pricing, financial constraints, and leverage regulation," Journal of Financial Economics, Elsevier, vol. 172(C).
    12. repec:osf:osfxxx:ds7bx_v1 is not listed on IDEAS

    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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