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Green Transmission: Monetary Policy in the Age of ESG

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  • Patozi, A.

Abstract

In this paper, I investigate how the Net-Zero transition affects the transmission of monetary policy. I first document an upward trend in environmental performance among US publicly listed companies over the last decade. Second, I evaluate the implications of firms becoming ‘greener' for the transmission of monetary policy on asset prices, credit risk and firm-level investment. In response to a shock to monetary policy, ‘green' firms (with high environmental scores) are significantly less impacted than their ‘brown' counterparts (with lower environmental scores). The dependence of monetary policy responses on firm-level greenness is not explained by intrinsic differences in firms' characteristics. Instead, I show that the heterogeneous response is the result of investors' preferences for sustainable investing. Using a stylized theoretical framework, I illustrate how incorporating such preferences attenuates the semi-elasticity of ‘green' asset prices with respect to monetary policy shocks.

Suggested Citation

  • Patozi, A., 2023. "Green Transmission: Monetary Policy in the Age of ESG," Cambridge Working Papers in Economics 2311, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2311
    Note: ap991
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    More about this item

    Keywords

    Climate Change; ESG; Heterogeneity; Monetary Policy; Sustainable Investing;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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