Discussion paper
DP20133 Sustainable Investing and Public Goods Provision
We model investors who take into account the amount of public goods firms produce (e.g., carbon emission reductions). In an asset pricing model with production and public goods, we find that more environmentally conscious investors invest more overall, invest more in clean firms, and may invest more in dirty firms. The magnitude and sign of CAPM alphas depends on a comparison between a firm's systematic risk and its relative public good contribution. There is underprovision of the public good. Government provision crowds out private provision, and may reduce overall public good provision. Government provision may be dominated by green subsidies.
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