We argue for the introduction of firm-level emission futures contracts as a novel way of assessing the real impact of ESG initiatives. Our measure is based on the forward-looking market-based valuation of firm-level CO2 emissions. We establish both theoretically and empirically that backward-looking subjective ratings are limited to the extent that they fail to capture future reductions in emissions. We show evidence that although lower emissions have predicted higher E ratings, higher E ratings have predicted higher, not lower, emissions. As such, by following these subjective ratings, investors may have inadvertently allocated their money to firms that pollute more, not less. We discuss several applications of our new measure, including executive pay and investment management.

This paper estimates the effect of sustainable shareholder engagement on firm's investments. We study the real estate industry where investments are sporadic and occur following depreciation cycles. SEC restrictions (rule 240.14a-8) on shareholder proposals, in combination with the asset depreciation cycles, create random variation enabling us to identify firms' sustainable investment decisions. Using unique microdata tracking investments in all public US commercial real estate properties over the past two decades, we find that sustainable engagement effectively steers firms to initiate tangible and long-lasting sustainable retrofits. However, engagement is ineffective or impairs such investments when it does not coincide with reinvestment periods, or investors vote down the proposal.

Financing cost differentials tilt the calculus for households toward electric vehicles (EVs). Previous research shows that incentives and costs of owning and operating EVs—for example, tax incentives and maintenance costs—influence consumer decisions to transition from tradi- tional cars to EVs. We show that auto finance—auto loans and the auto ABS that pool those loans—is also a key channel to support the transition. We use 85 million monthly observa- tions on auto loans backing publicly-placed auto ABS to show three things. After controlling for borrower risk characteristics, auto loans backing EVs default 30 percent less in percentage change terms relative to combustion engine vehicles (CEV). Part of the lower default rate is attributable to insulation from gasoline price shocks: a one standard deviation increase in gas prices results in 1 percentage point lower default rate for EV borrowers relative to CEV borrow- ers. In addition, EVs have, on average, 2.22% lower interest rates than CEVs, equivalent to a $2,000 lower price on the vehicle. This lower rate, however, is only found for lenders associated with automakers (“captives”), likely a reflection of manufacturer incentives to turn EVs. This evidence is reinforced in ABS pricing, where we find that EVs and CEVs are priced equivalently in coupons and spreads in the pools. Thus, lower EV default rates are not yet being compen- sated to households, implying a potential gain for consumers and EV calculus in separating ABS markets.