The greenium (the expected return of green securities relative to brown) is a central impact measure for ESG investors. The literature estimates a wide range of greeniums based on realized returns, but we show that such estimates are not robust to changing the time period, country, or green measure. Instead, we propose a robust green score combined with forward-looking expected returns, yielding a precisely estimated annual equity greenium of −27 basis points per standard deviation increase in greenness. Further, we provide precisely estimated greeniums for corporate bonds, the weighted-average cost of capital, and sovereign bonds, and show how the greenium varies across countries and time.

We evaluate the effectiveness of portfolio mandates on equilibrium capital allocation. We show that the impact of mandates crucially depends on firms' demand elasticity of capital. In a production economy with constant returns to scale, firms' demand for capital is infinitely elastic, and mandates can significantly impact the allocation of capital across sectors despite having a negligible impact on the cost of capital. This is in sharp contrast to an endowment economy where inelastic demand for capital implies equilibrium price reactions to mandates, which significantly reduce their effectiveness. Within a canonical real-business-cycle model calibrated to match key asset-pricing and macroeconomic moments, we estimate that a significant portion of the mandate remains effective in shaping equilibrium capital allocation, even when there is little disparity in the cost of capital across sectors. Our analysis challenges the common practice of judging the effectiveness of portfolio mandates by their impact on firms' cost of capital.

This paper develops and tests an equilibrium model for analyzing active fund management with ESG considerations. Sustainable investing incentivizes mutual fund managers to intensify information acquisition, expanding the scope of the active fund industry. Sustainability-guided information and trading decisions result in increasing portfolio deviation from benchmarks at the fund level, while they contribute to enhancing price informativeness and diminishing discount rates at the stock level. Collectively, the negative ESG-expected return relation amplifies for green assets but weakens for brown assets, as supported by evidence from the implied cost of equity capital.