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Sustainable Investing in Imperfect Markets

Author

Listed:
  • Thorsten Hens

    (University of Zurich; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute)

  • Ester Trutwin

    (University of Zurich; 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.

Suggested Citation

  • Thorsten Hens & Ester Trutwin, 2023. "Sustainable Investing in Imperfect Markets," Swiss Finance Institute Research Paper Series 23-83, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2383
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    More about this item

    Keywords

    Impact Investing; ESG Investing; Sustainable Consumption; Environmental Kuznets Curve;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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