Climate Investing

14The Thesis for Green Investing and Other ESG through the Looking Glass of China and the US

14.1. Introduction

Green investing, which falls under “E” in conventional ESG investing, has become dominant in ESG research. Green investing seeks to tilt firm behaviors towards greater care for our (E)nvironment. Where the invisible hand of the market stops, the visible hand of ESG investors moves in to impact the behavior of corporate executives and fund managers. When enough investors reduce the allocation to firms that pollute, the share prices of firms with a bad “E” score fall and their cost of equity increases. Declining share prices also hurts executives whose wealth is concentrated in their companies’ equities. The threat of “divesture” by “Green” investors incentivizes these executives to care about environmental issues, when otherwise they might focus exclusively on firm profit maximization.

Advocates of “Green investing”, while most of them are willing to sacrifice returns for a better environment, do understand that if “return augmentation” can be assured, the Green movement would be meaningfully more successful. In this chapter, we will specifically explore whether there is a premium to Green investing; if that premium is negative, who should bear the cost? However, firstly, we discuss whether society at large can agree upon the measurement of “Greenness” and the prioritization of “Green solutions”. We illustrate with examples from the United States and China to show ...