Conference Agenda

To align the bank’s business and portfolio with the UN Sustainable Development Goals and the Paris Climate Agreement, the United Nations launched in 2019 the UN Principles for Sustainable Banking. More than half of the banking industry worldwide adhered to the principles. We build up a dataset which includes all the banks that adhered to the UN Principles (277) and a sample of 669 peer nonmember banks from 77 countries to study what are the determinants and effects of membership on banking behavior and performance. The results show that larger, listed and riskier banks are more likely to join the UN Principles. In contrast, a higher intensity of CO2 (CO2/GDP) of the country, climate-related natural disasters, public awareness of global warming, or the Paris agreement do not stimulate the likelihood of adherence. Interestingly, a higher bank’s market power decreases the incentive to join the UN Principles. The behavior and performance of member banks relative to non-members did not change significantly upon membership. This conclusion is also supported by additional evidence on a small sample of banks related to green lending and the issuance of green bonds. In contrast, member banks overstate their green language in the annual report in relation to their behavior and ESG performance, although only 27% of them reveal information about the CO2 content of their loans. Overall, the paper suggests that current UN Principles do not spur the green transition and highlights the symbolic nature of voluntary green commitments in banking.

We show that sustainable investment by mutual funds influences non-financial firms’ stock prices and real outcomes. Our identification exploits the EU Sustainable Finance Disclosure Regulation (SFDR) – requiring mutual funds to disclose no, mild, or strong commitment to sustainable investment – and rich microdata. Funds disclosing a mild commitment reduce exposure to high ESG risk (“brown”) stocks, relatively to those with no commitment. Differently, strongly committed funds do not adjust, being already perceived as sustainable and facing little incentive to further signal their ESG strategy. The divestment of brown firms occurs independently of their prior sustainability pledges and reduces their stock prices. This reduction is in turn associated with lower environmental spending and higher carbon emissions. Our findings suggest that blanket divestment by ESG funds may unintentionally worsen environmental performance by weakening firms’ incentives to invest in sustainability.

This paper examines whether sustainability uncertainty is priced in the cross-section of US stock returns. Using the newly introduced ESG-based Sustainability Uncertainty Index (ESGUI), we estimate firm-level exposure to aggregate sustainability uncertainty and construct tradeable uncertainty-sorted portfolios. The empirical design distinguishes between directional pricing and intensity-based pricing by comparing a conventional signed-beta specification with an absolute-beta specification based on the magnitude of ESGUI exposure. The signed-beta design produces weak and statistically insignificant abnormal returns across standard benchmark models and delivers little evidence of a stock-level cross-sectional premium. In contrast, the absolute-beta design generates economically large and statistically significant alphas under all classical asset pricing models, with supporting evidence from Fama-MacBeth regressions. Portfolio-level diagnostics further show that signed-beta portfolios exhibit a U-shaped return pattern: firms at both tails of the signed-beta distribution earn higher returns than firms with moderate exposure. The evidence therefore indicates that the US equity market prices the intensity of firms' exposure to sustainability uncertainty rather than the direction of that exposure. Sustainability uncertainty is a priced source of risk in US equities, but it enters expected returns through a nonlinear, magnitude-based channel rather than through a simple directional premium.

Recent asset-pricing models imply that a brown-minus-green (BMG) portfolio should earn a positive expected return as compensation for climate and transition risk, yet realized BMG returns are mixed. We propose that the key missing state variable is investors' belief dispersion about economic damages from climate change. Empirically, we proxy belief dispersion in financial markets using analysts’ earnings forecasts for matched brown and green firms. Belief dispersion is low pre-Paris agreement, but becomes more volatile thereafter and, more importantly, predicts BMG returns. Motivated by these facts, we develop a model in which investors' motivations are purely pecuniary. They internalize climate damages but disagree about their magnitude. Climate change reduces future output, and investors' heterogeneous beliefs generate speculative trading and alter the equilibrium risk-sharing arrangement. The equilibrium admits a two-factor representation (financial and climate risk) augmented by belief-driven pricing terms. Introducing an endogenous emissions cap determined by political pressure links disagreement to transition risk. We show that the sign and magnitude of the BMG expected return depend on belief dispersion and political pressure: BMG premia can be positive, zero, or negative, and sufficiently convex damages restore a uniformly positive BMG return premium.