DP17100 Socially Optimal Sustainability Standards with Non-Consequentialist ("Warm Glow") Investors

Author(s): Roman Inderst, Marcus M. Opp
Publication Date: March 2022
Keyword(s): ESG, green financing, labelling, sustainability
JEL(s):
Programme Areas: Public Economics, Financial Economics, International Macroeconomics and Finance, Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17100

Agencies around the world are in the process of developing taxonomies and standards for sustainable (or ESG) investment products. A key assumption in our model is that of non-consequentialist private investors (households) who derive a "warm glow" decisional utility when purchasing an investment product that is labelled as sustainable. We ask when such labelling is socially beneficial even when the social planner can impose a minimum standard on investment and production. In a model of financial constraints (Holmström and Tirole 1997), which we close to include consumer surplus, we also determine the optimal labelling threshold and show how its stringency is affected by determinants such as the prevalence of warm-glow investor preferences, the presence of social network effects, or the relevance of financial constraints at the industry level.