Altruism in Investor Preferences: A Catalyst for the Green Transition

Abstract

Economists frequently point out how hard it is for companies to invest in environmentally sustainable solutions and at the same time keep their businesses attractive to investors. In the public and political debate economic subsidies are therefore often seen as essential tools in fostering the green transition. This chapter challenges this notion. We suggest that people may develop tastes for investing in green projects and explore the implications of such preferences for asset-pricing. Then, we discuss whether this taste exists in practice by pointing out research that directly tried to measure it in the United States. Moreover, we show that the existence of such a taste should reduce the cost of capital of green investments. We argue that the development of the preference for environmentally correct projects by the investor should work as a natural and automatic incentive to encourage sustainable projects; this should facilitate green and sustainable transition regardless of the level of governmental subsidies. However, the lack of consistency of ESG methodologies that are used as benchmarks by investors when choosing their green portfolios could create distrust of responsible investors. This could in turn counteract the effects of their green taste on asset-pricing.