![Figure 7. Aggregate Social Impact. The figure plots S(d) − S(0), the aggregate social impact induced by ESG-motivated investors. We assume the firms’ initial ESG characteristics g0,n are uniformly distributed in [− √ 3, √ 3]. (These endpoints maintain g′0ι = 0 and g ′ 0g0 = 1.) The two colored regions indicate the components of Sn(d)−Sn(0) from equation (56), aggregated across firms. In Panel A, results are plotted against λ, the fraction of wealth belonging to ESG investors, assuming ∆ = 0.02. In Panel B, results are plotted against ∆, the maximum certain return an ESG investor would sacrifice to invest in the ESG portfolio instead of the market portfolio, assuming λ = 0.5. All remaining parameter values are the same as in Figure 6.](/figures/figure-7-aggregate-social-impact-the-figure-plots-s-d-s-0-1t1o9kuq.webp)
Q2. What have the authors stated for future works in "Sustainable investing in equilibrium" ?
While the model ’ s predictions for alphas have been examined empirically by prior studies, most of its other predictions remain untested, presenting opportunities for future empirical work. One challenge is that their model aims to describe the world of the present and the future, but not necessarily the world of the past.
Q3. Why do brown firms lose value in states of the world?
Because brown firms lose value in states of the world investors dislike, they are riskier, so they must offer higher expected returns.
Q4. What is the effect of the hi(S) term on other agents?
When an agent tilts toward green stocks, she generates a positive externality on other agents via the hi(S) term in their utility.
Q5. What is the effect of climate change on investors?
In addition, worse climate can elevate investors’ tastes for green holdings, for example, as a result of stronger public pressure on institutional investors to divest from brown assets.
Q6. What is the effect of climate change on brown assets?
If the climate worsens unexpectedly, brown assets lose value relative to green assets (e.g., due to new government regulation that penalizes brown firms).
Q7. Why do the authors compute absolute values of portfolio tilts?
The authors compute absolute values of portfolio tilts because ESG-motivated investors both over- and under-weight stocks relative to the market.
Q8. What does Hoepner et al. (2018) find?
Hoepner et al. (2018) find that ESG engagement reduces firms’ downside risk, as well as their exposures to a downside-risk factor.
Q9. What is the first source of social impact for firms with extreme ESG characteristics?
The first source, from tilting investment toward green firms, is zero for an ESG-neutral firm, but it is large for very green or very brown firms, which experience the largest shifts in investment (bottom blue region).
Q10. Why do agents take asset prices as given when choosing their optimal portfolios?
Due to their infinitesimal size, agents take asset prices (and thus also the return distribution) as given when choosing their optimal portfolios, Xi, at time 0.
Q11. What is the reason why C and fg are negatively correlated?
If climate shocks are the only reason behind shifts in customers’ and investors’ tastes, C̃ and f̃g are perfectly negatively correlated.
Q12. What is the expected utility of agent i in equilibrium?
As the authors show in the Appendix, agent i’s expected utility in equilibrium is given byE { V (W̃1i) } = V̄ e− δ2 i 2a2 g′Σ−1g , (13)where V̄ is the expected utility if the agent has δi = 0.
Q13. What is the impact of a firm’s ESG tastes?
the impact is larger for firms with smaller market betas because such firms have a lower cost of capital to begin with, so the ESG-induced change in their cost of capital is relatively larger.