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(Un-)sustainable Investment

Author

Listed:
  • Pablo Garcia Sanchez
Abstract
To finance the fight against climate change, sustainable investment is projected to surpass $40 trillion by 2030. In principle, sustainable investment diverts funds away from brown firms, increasing their borrowing costs to encourage them to become greener. However, recent empirical evidence does not support this channel, as the most polluting firms tend to become more brown in response to higher costs of capital. I formalise this empirical finding by developing a stylised model where brown firms must choose the optimal time to switch from old, polluting technologies to new, clean alternatives. Results indicate that raising the cost of capital for brown firms can have non-monotonic effects on the optimal switching times. For example, firms operating in capital-intensive sectors, often among the largest polluters, are more likely to respond to higher borrowing costs by delaying their switching time. In contrast, brown firms that are nearly ready to switch to cleaner methods may speed up their transition when faced with higher borrowing costs.

Suggested Citation

  • Pablo Garcia Sanchez, 2024. "(Un-)sustainable Investment," BCL working papers 187, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp187
    as

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    File URL: https://www.bcl.lu/en/publications/Working-papers/187/BCLWP187.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Sustainable Investment; Cost of Capital; Green Transition;
    All these keywords.

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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