Firms increase climate-friendly investments if they perceive that the cost of green capital is lower than that of brown capital. We show that green and brown firms perceived their cost of capital to be the same before 2016, but after the post-2016 surge in sustainable investing, green firms perceived their cost of capital to be on average 1 percentage point lower. This difference has widened as sustainable investing and preferential capital allocation to green firms by governments have intensified. Within some of the largest energy and utility firms, managers have started applying a lower cost of capital to greener divisions. The observed changes in the perceived cost of green capital incentivize cross-firm and within-firm reallocation of capital toward greener investments.