Firms increasingly borrow via sustainability-linked loans (SLLs), contractually tying spreads to their ESG performance. SLLs vary widely in transparency of disclosure regarding sustainability-related contract details and tend to be issued to borrowers with superior ESG profiles. While high-transparency SLL borrowers maintain this performance, low-transparency SLL borrowers exhibit significantly deteriorating ESG performance after issuance. Both high- and low-transparency borrowers pay substantial fees to obtain SLLs. The results are consistent with high-transparency borrowers using SLLs to “certify” their preexisting ESG commitments, but low-transparency borrowers “greenwashing” with empty SLL labels. Evidence on drawdowns, renegotiations, and stock market reactions further supports these interpretations

We study the equilibrium effects of the “S” dimension of ESG under imperfect competition. ESG policies are pledges made by firms that constrain managers to treat their stakeholders better than market conditions alone dictate. Moderate policies limit market power and prompt managers to be more competitive; aggressive polices backfire, both for adopting firms and intended beneficiaries. In contrast to the “shareholder primacy” paradigm, competition in ESG policies under the “stakeholder capitalism” paradigm is a panacea for market power, delivering the first-best outcome in equilibrium. We discuss drivers behind the recent rise in ESG, ESG-linked compensation, and disclosure practices

We estimate financial institutions’ portfolio tilts related to U.S. stocks’ environmental, social, and governance (ESG) characteristics. From 2012 to 2023, ESG-related tilts consistently total about 6% of the investment industry’s assets and rise from 17% to 27% of institutions’ total portfolio tilts. Significant ESG tilts arise from the choice of stocks held and, especially, the weights on stocks held. The largest institutions tilt increasingly toward green stocks, while other institutions and households tilt increasingly brown. Divestment from brown stocks is typically partial rather than full, even for individual mutual funds. UNPRI signatories and European institutions tilt greener; banks tilt browner

The change in the cost of capital that results from a divestiture strategy can be closely approximated by a simple function of three parameters: (1) the fraction of socially conscious capital, (2) the fraction of targeted firms in the economy and (3) the return correlation between the targeted firms and the rest of the stock market. When calibrated to current data, we demonstrate that the impact on the cost of capital is too small to meaningfully affect real investment decisions. We then derive the conditions that would be required for the strategy to have a meaningful impact. We empirically corroborate our theoretical results by studying firm changes in ESG status and are unable to detect an impact of ESG divestiture strategies on the cost of capital of treated firms. Our results suggest that to have impact, instead of divesting, socially conscious investors should invest and exercise their rights of control to change corporate policy

Our paper analyzes whether a planner should design a taxonomy for sustainable investment products when conventional tools for environmental regulation can also be used to address externalities arising from firm production. We first show that the private market provision of ESG funds marketed to retail investors involves greenwashing , so that a mandatory taxonomy is necessary to generate real effects of sustainable finance . However, the introduction of such a taxonomy can only improve welfare, on top of optimally chosen environmental regulation, if financial frictions constrain socially valuable economic activity. Otherwise, environmental policy alone is sufficient to optimally address externalities