Conference Agenda

We study equilibrium asset prices in a model where investors favor ``green'' over ``brown'' goods. We show that demand elasticity of goods crucially affects \emph{assets}' riskiness. When demand elasticity is high, brown assets are safer than green, because they hedge against consumption risk. The opposite holds when goods' demand elasticity is low. Our model therefore predicts that the ``green minus brown'' stock return spread (green premium) varies in the cross section and increases in the price elasticity of demand. We test this novel prediction on US stocks and find that over the 2012--2022 period the annual green premium is 11.7\% for firms with high demand elasticity, while it is much smaller and insignificant for firms with low demand elasticity. The high green premium for high-demand elasticity firms is robust to standard risk adjustments and to alternative measures of demand elasticity; it cannot be explained by unanticipated shocks to investors' environmental concerns, and remains strong after using option-implied measures of expected returns. These findings underscore the critical role of goods' demand elasticity for understanding the impact of responsible consumption on asset prices.

Are investors’ preferences for responsible investing affected by their idiosyncratic personal experiences? Using a comprehensive dataset for hospital visits and the information on portfolio holdings by retail investors in Denmark, we show that when an investor’s child is diagnosed with a respiratory disease, the investor decreases (increases) portfolio weights of “brown” (“green”) stocks but does not alter their holdings of ESG funds. Consistent with parents attributing respiratory diseases to air pollution, we find no effects for non-respiratory diseases. The results are stronger for more severe diseases and are entirely driven by parents who live with their children.

Exploiting the unique “twin” structure of German government green and conventional securities, we use a dynamic term structure model to estimate a frictionless

sovereign risk-free greenium, distinct from the yield spread between the green security

and its conventional twin (the green spread). The model purifies the green spread from

confounding and idiosyncratic factors unrelated to environmental concerns. While the

model-implied greenium exhibits a significant relation with proxies of shocks to climate concerns—and the green spread does not—the green spread correlates with stock

market prices and measures of flight-to-quality. We also estimate the greenium term

structure and expected green returns.

We analyze jointly optimal carbon pricing and financial policies under financial constraints and endogenous climate-related transition and physical risks. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on the impact of physical climate risk on collateral values. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and compare the welfare consequences of introducing a cap-and-trade system, green subsidies, or leverage regulation. Our analysis also shows that efficient carbon pricing can be supported by carbon price hedging markets but may be hindered by socially responsible investors in equilibrium.

In this paper, I study how the political environment impacts the availability of ESG options to individuals. I establish the following judicial channel: because the respect of fiduciary duty is adjudicated by politically-oriented judges, some retirement plans are reluctant to offer ESG options due to litigation risk. I document that there is a significant gap in ESG offerings in retirement plans between conservative and liberal judicial circuits, that is only partially explained by demographic characteristics, firm characteristics, and local political preferences. With a decrease in judicial discretion, which reduces the influence of judges' political orientations, retirement plans face more uniform treatment between judicial circuits. This closes a substantial share of the gap in the ESG market between jurisdictions, and employees in conservative areas increase their ESG investments more than employees in liberal areas. I find that this effect is mostly driven by green firms, small firms, and firms located in the liberal counties of conservative circuits. Additionally, adding ESG options to the menu leads employees to contribute more overall to their retirement plans.

We study the uncertain transition to a carbon-neutral economy. The requisite technological innovation is made more probable through research and development (R&D). We explore multiple channels of economic and geoscientific uncertainties that impact this transition, and we show how to assess the relative importance of their varied contributions. We represent the social benefit of R&D and cost of global warming as expected discounted values of social payoffs using a probability measure adjusted for concerns about model misspecification and prior ambiguity. Our quantitative results show the value of R&D investment even when the timing of its technological success is highly uncertain.

This paper investigates how shocks to expected cash flows influence CEO incentive compensation. Exploiting changes in compliance with environmental regulations as shocks to expected future cash flows, we find that adverse shocks typically prompt corporate boards to recalibrate CEO compensation to reduce risk-taking incentives. However, this pattern is not uniform. Financially distressed firms exhibit milder reductions in compensation convexity, with some even increasing it, suggesting a "gambling for resurrection" strategy. Moreover, the strength of corporate governance influences shareholders' capacity to align executive incentives with shareholder risk preferences following unanticipated changes in the stringency of environmental regulations.

We show that firms increase their pollution intensity as they become more financially distressed, particularly in locations with high environmental liability risks. We rationalize these facts using a dynamic model featuring endogenous default and clean and dirty assets. We assume that polluting practices can reduce short-term costs at the expense of exposing firms to persistent liability and regulatory risks. Thus, as firms become more financially distressed, they shift the composition of their assets toward the more polluting ones, akin to a risk-taking motive. Our counterfactuals highlight the limited environmental impact of heightened financing costs as firms intensify their pollution while scaling down.

We study production responses to emission capping regulation on manufacturing firms. We find that firms lowered their pollution as they transitioned from self-generated to externally sourced electricity, shifted towards producing less coal-intensive products, and increased their abatement expenditures. Firms preserved profitability by increasing their production towards higher-margin products. However, firms in highly polluting industries produced fewer products, and in the aggregate, leading to lower product variety, higher markups, an altered firm-size distribution, and lower business formation. Our findings highlight both the mechanisms behind how mandated pollution reduction can be effective and its costs, suggesting a loss in agglomeration externalities.

The rising frequency and severity of abnormally high temperatures pose significant threats to the health and productivity of exposed workers. This paper identifies a labor channel of corporate exposure to climate risk, measured using firms’ reliance on workers exposed to high temperatures while performing job duties. Consistent with the physical risk mechanism, unexpected extreme heat significantly reduces firm-level and plant-level labor productivity, making labor less efficient than capital as a production input. Firms adapt to these disruptions by shifting toward more capital-intensive production functions, i.e., higher capital-labor ratios. Firms further respond by investing more in robotics-related human capital and developing more automation-related technology. At the macro level, climate change impedes the growth of high-exposure industries in hot areas. My findings highlight that climate change accelerates automation in occupations and firms exposed to rising temperatures.

This paper studies how homeowners insurance markets respond to growing climate losses and how this impacts mortgage market dynamics. Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment. Yet, despite their low quality, these insurers secure high financial stability ratings, not from traditional rating agencies, but from emerging rating agencies. Importantly, these ratings are high enough to meet the minimum rating requirements set by government-sponsored enterprises (GSEs). We find that these new insurers would not meet GSE eligibility thresholds if subjected to traditional rating agencies’ methodologies. We then examine the implications of these dynamics for mortgage markets. We show that lenders respond to the decline in insurance quality by selling a large portion of exposed loans to the GSEs. We quantify the counterparty risk by examining the surge in serious delinquencies and foreclosure around the landfall of Hurricane Irma. Our results show that the GSEs bear a large share of insurance counterparty risk, which is driven by their mis-calibrated insurer eligibility requirements and lax insurance regulation.

This paper investigates whether green investors can influence corporate greenhouse gas emissions through capital markets, and if so, whether they have a larger effect by the stock of polluting companies in order to limit their access to capital, or by acquiring polluters’ stock and engaging with management as owners. We focus on public pension funds, classifying them as green or nongreen based on which political party controlled the fund. To isolate the causal effects of green ownership, we use exogenous variation caused by state-level politics that shifted control of the funds, and portfolio rebalancing in response to returns from non-equity investment. Our main finding is that companies reduced their greenhouse gas emissions when stock ownership by green funds increased and did not alter their emissions when ownership by nongreen funds changed. Other evidence based on voting, shareholder proposals, and activist pension funds suggests that ownership mattered because of active engagement by green investors, and more through attempts to persuade than voting pressure. We do not find that companies with green investors were more likely to sell off their high-emission facilities (greenwashing). Overall, our findings suggest that (a) corporate managers respond to the environmental preferences of their investors; (b) divestment of polluting companies may lead to greater emissions; and (c) private markets may be able to partially address environmental challenges independent of government regulation.

We study the implications of model uncertainty in a climate-economics framework with three types of capital: “dirty” capital that produces carbon emissions when used for production, “clean” capital that generates no emissions but is initially less productive than dirty capital, and knowledge capital that increases with R&D investment and leads to technological innovation in green sector productivity. To solve our high-dimensional, non-linear model

framework we implement a neural-network-based global solution method. We show there are first-order impacts of model uncertainty on optimal decisions and social valuations in our integrated climate-economic-innovation framework. Accounting for interconnected uncertainty over climate dynamics, economic damages from climate change, and the arrival of a green technological change leads to substantial adjustments to investment in the different capital types in anticipation of technological change and the revelation of climate damage severity.

In Australia’s Murray Darling Basin (MDB), short term (allocation) and long term (entitlement) water rights are separately traded, centrally reported, and disseminated to the public. I utilize this setting to demonstrate three primary findings concerning water rights and climate change risk. First, water rights appear to be a climate change hedge: in periods of diminishing supply, allocation cash flows spike as price increases offset quantity declines. Second, since 2014, entitlement prices in climate exposed areas have increased approximately $1500 per MegaLitre (about 39%) more than prices in non-climate exposed areas while allocation prices have remained similar in both areas. These price differences provide a clear market signal about future scarcity and help to define investment opportunities available today to preserve water resources. Finally, estimating the allocation cash-flow to rainfall elasticity and extrapolating using the 2050 IPCC rainfall scenarios, I attribute about 21% of the price effect to differences in expected cash flow, and the remainder to a lower discount rate. The premium I estimate equates to a 1.2% lower rate of return for climate hedge or mitigation assets, a critical parameter in climate economics.

We construct novel measures of mutual funds’ environmental, social, and governance (ESG) commitment by analyzing the discretionary investment-strategy descriptions of their prospectuses. We find that fund flows respond strongly to text-based ESG measures. Using discrepancies between text- and fundamentals-based ESG measures, we identify greenwashing funds. We find that greenwashing is more prevalent since 2016 (coinciding with the Paris Agreement) and among funds with lower past flows and higher expense ratios, and isn't associated with superior subsequent performance. Furthermore, greenwashers attract similar flows to genuinely green funds, suggesting that investors cannot distinguish them. Our results could help regulators' efforts to combat ESG-related misconduct.

We examine whether foreign institutional capital promotes green growth in emerging-market firms, using firm-level and China A-shares’ market-level inclusions in the MSCI Index as shocks to foreign capital. While foreign capital boosts output in emerging-market firms, emissions rise disproportionately, leading to substantial increases in emissions intensity. In contrast, emissions intensities of developed-market firms tend not to increase with foreign capital. These increases in emissions intensity are concentrated in emerging markets with weaker environmental regulations and firms receiving more capital from high-sustainability-score investors. Overall, results suggest that environmental considerations are assigned lower priority when emerging-market firms utilize foreign capital for growth.

We conduct a field experiment in partnership with the largest job platform in Brazil to study how environmental, social, and governance (ESG) practices of firms affect talent allocation. We find both an average job-seeker’s preference for ESG and a large degree of heterogeneity across socioeconomic groups, with the strongest preference displayed by highly educated, white, and politically liberal individuals. We combine our experimental estimates with administrative matched employer-employee microdata and estimate an equilibrium model of the labor market. Counterfactual analyses suggest ESG practices increase total economic output and worker welfare, while increasing the wage gap between skilled and unskilled workers.

Women continue to be underrepresented in corporate leadership positions. This paper studies the role of social connections in women's career advancement. We investigate whether access to a larger share of female peers in business school affects the gender gap in senior managerial positions. Merging administrative data from a top-10 US business school with public LinkedIn profiles, we first document that female MBAs are 24 percent less likely than male MBAs to enter senior management within 15 years of graduation. Next, we use the random assignment of students into sections to show that a larger proportion of female MBA section peers increases the likelihood of entering senior management for women but not for men. This effect is driven by female-friendly firms, such as those with more generous maternity leave policies and greater work schedule flexibility. A larger proportion of female MBA peers induces women to transition to these firms where they attain senior management roles. We find suggestive evidence that some of the mechanisms behind these results include job referrals and gender-specific information transmission. These findings highlight the role of social connections in reducing the gender gap in senior management positions.