Working Paper: CEPR ID: DP17100
Authors: Roman Inderst; Marcus Opp
Abstract: 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.
Keywords: sustainability; ESG; green financing; labelling
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sustainability threshold (s) (Q01) | fraction of sustainable investments (Q01) |
| sustainability threshold (s) (Q01) | industry size (L81) |
| investor preferences (G11) | required rate of return for sustainable investments (Q01) |
| warm glow investor preferences (G11) | sustainability threshold (s) (Q01) |
| labeling of investments (G24) | social welfare (I38) |
| investor preferences (G11) | optimal threshold (H21) |
| labeling of investments + financial constraints (G24) | investment decisions (G11) |
| investor preferences (G11) | output decisions (E23) |