The impact of green investors on stock prices

BISWorkingPapers No1127 Theimpactofgreeninvestorsonstockprices byGongCheng,EricJondeau,BenoitMojonandDimitriVayanos MonetaryandEconomicDepartment September2023(revisedMarch2024) JELclassification:G12,G23,Q54. Keywords:Assetpricing,greeninvesting,passiveinvesting,portfoliorebalancing. BISWorkingPapersarewrittenbymembersoftheMonetaryandEconomicDepartmentoftheBankforInternationalSettlements,andfromtimetotimebyothereconomists,andarepublishedbytheBank.Thepapersareonsubjectsoftopicalinterestandaretechnicalincharacter.TheviewsexpressedinthemarethoseoftheirauthorsandnotnecessarilytheviewsoftheBIS. ThispublicationisavailableontheBISwebsite(www.bis.org). ©BankforInternationalSettlements2023.Allrightsreserved.Briefexcerptsmaybereproducedortranslatedprovidedthesourceisstated. ISSN1020-0959(print) ISSN1682-7678(online) TheImpactofGreenInvestorsonStockPrices∗ GongCheng,EricJondeau1,BenoitMojon2,andDimitriVayanos31HECLausanneandSwissFinanceInstitute 2BankforInternationalSettlements 3LondonSchoolofEconomics,CEPRandNBER Reviseddraft,March12,2024 Abstract Westudytheimpactofgreeninvestorsonstockpricesinadynamicequilibriummodelwhereinvestorsaregreen,passiveoractive.Greeninvestorstrackanindexthatprogressivelyexcludesthestocksofthebrownestfirms,passiveinvestorsholdavalue-weightedindexofallstocks,andactiveinvestorsholdamean-varianceefficientportfolio.Contrarytotheliterature,wefindlargedropsinthestockpricesofthebrownestfirmsandmoderateincreasesforgreenerfirms.Theseeffectsoccurprimar-ilyupontheannouncementofthegreenindex’sformationandcontinueduringtheexclusionprocess.Theannouncementeffectsimplyafirst-moveradvantagetoearlyadoptersofdecarbonisationstrategies. JEL:G12,G23,Q54 Keywords:Assetpricing,greeninvesting,passiveinvesting,portfoliorebalancing ∗chengjacques@gmail.com,eric.jondeau@unil.ch,benoit.mojon@bis.org,d.vayanos@lse.ac.uk.WethankparticipantsintheBISResearchMeetingandtheNGFSExpertNetworkonResearchwebinarseriesfortheirconstructivecomments,andJingtongZhangforexcellentresearchassistance.TheprojectstartedwhenGongChengwasattheBIS.TheviewspresentedinthispaperarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheBIS. 1Introduction Inthefightagainstclimatechange,theroleoffinancialassetownersandmanagersiswidelydebated.Aslargeinstitutionalinvestorsareinvestinginfinanciallydiversifiedportfolios,theyholdsharesoffirmswithhighgreenhousegas(GHG)emissionsandthuscontributetoglobalwarmingbyfinancingpollutingactivities.Anincreasingnumberofcorporateinitia-tiveshavesoughttopromotenetzeroinvestmentinrecentyears.CentralBanks,throughtheNetworkforGreeningtheFinancialSystem(NGFS),havealsobeenreflectingongreen-ingtheirinvestmentportfolios.Twobroadapproachespromotinggreeninvestmentprevail.Investorscandivestfromthebrownestfirms(divestment)orinfluencethetransitionofthosefirmstogreeneroperationsthroughtheirvotesatannualgeneralmeetings(engagement). Akeyquestionthatdrivesinvestors’considerationofdivestmentversusengagementconcernswhetherdivestmenteffectivelyraisesthecostofcapitalofbrownfirmsversusgreenfirmsandtherebyinfluencesbrownfirms’futurebusinessdevelopment.Inparticular,sharesofbrownstockssoldbygreeninvestorswillbeboughtbylessclimate-consciousinvestors.Asaresult,theimpactofdivestmentonstockpriceswilldependonthewillingnessofthoseotherinvestorstoabsorbadditionalsharesofbrownstocks.Iftheretherearefewgreeninvestorsrelativetotheircounterparties,thenthepriceimpactwillbesmall.ThispointismadebyBerkandvanBinsbergen(2022)inathought-provokingpaper.Withintheircalibration,whichassumesasmallcommunityofgreeninvestors,theyfindthatthechangeinthecostofcapitalresultingfromdivestmentisinsignificant. Recenttrendsamongfinancialinvestorssuggestthatthecommunityofgreeninvestorsmightbefarfromsmall.Severalinitiativeshavebeenlaunchedbyinstitutionalinvestorstopromotenetzeroinvestment,someofthemundertheumbrellaoraspartneroftheUnited NationsFrameworkConventiononClimateChange.1Theseinitiativeshavecommittedto 1ThesegroupsincludetheNetZeroAssetManagers(NZAM)Initiative,theNetZeroAssetOwner(NZAO)Alliance,theGlasgowFinancialAllianceforNetZero(GFANZ),theClimateAction100+,theParisAlignedAssetOwners(PAAO),theInstitutionalInvestorsGrouponClimateChange(IIGCC)among transitioninginvestmentportfoliostonetzeroemissionsby2050,whichisconsistentwithatemperatureriseof1.5°C.Altogether,theyrepresentalargeshareoftheassetsunder managementintheworld,althoughnotalloftheirassetsaremanagedintheperspectiveof thenetzerotarget.Insuchasituation,itmightbethatthecounterpartiesofgreeninvestorsrequireasignificantpricediscounttobuybrownstocks. Inthispaper,westudywithinadynamicequilibriummodeltheimpactonstockpricesofinstitutionalinvestorsreducingtheirexposuretothefirmswiththehighestGHGemissions.Weconsiderthreecategoriesofinvestors.Activeinvestorsholdamean-varianceefficientportfolioofallstocks.Passiveinvestorsholdavalue-weightedindexofallstocksandrep-resentthelargeshareofnon-greenpassiveinstitutionalinvestors.Greeninvestorsholdavalue-weightedindexthatprogressivelyexcludesbrownfirms.Thebrownestfirmsareex-cludedfirst