top of page

Is sustainable investing counterproductive?

Seems a steady drip of academic research is out on the ‘real world’ impacts of ESG / sustainable investing, now with improving data sets. We’ve written on a few studies recently, like this. A new study out from two professors working with the National Bureau of Economic Research (NBER), Counterproductive Sustainable Investing… may refocus some of our sustainable investing efforts, finding that 'sustainable investing that directs capital away from brown firms and toward green firms … makes brown firms more brown without making green firms more green'.

The authors combine data on greenhouse gas emissions by company, the 'implied cost of capital' for these same companies (or how much it costs them to 'borrow' money for their projects), and the holdings of 'green investment funds' – US mutual funds – to look for correlations between green fund ownership (or non-ownership), cost of capital and environmental impact via company gas emissions. A general theory being companies with lower greenhouse gas emissions attract more investment from 'green funds', thereby lowering their cost of capital and encouraging more 'green' investment by these firms, and encouraging existing 'brown' firms to pursue green investments to lower their greenhouse gas emissions and their cost of capital.

The paper is thorough in its review of similar studies to date (the 6-page introduction alone summarizes the extensive ongoing research), and in the details of its findings and implications.


Overall, some of the more interesting findings:

  • Divestment is not discerning: '...we find that sustainable investors reward green firms much more than brown firms for the same percentage reduction in emissions (logically, it should be the other way around). This additional mistake is consistent with an affect heuristic … in which sustainable investors naively choose to disassociate from brown firms that they dislike.”

  • Brown firms react more to reduce emissions given changes in 'financial performance', and likewise 'significantly increase their emissions following an increase in their cost of capital'. Whereas they find existing green firms are relatively unresponsive to financial performance.

Overall, there appears to be an unfortunate lack of differentiation between percentage changes in emissions and quantity changes in emissions for companies by investors and ESG ratings providers.

This is a crucial issue:

'… because, holding constant firm size, the average brown firm emits 260 times as much pollution as the average green firm. Comparing a brown and green firm of equal size, an increase in emissions by a brown firm of 1% has the same actual environmental impact as an increase in emissions by a green firm of 260%. It is also much easier for a green firm to purchase a small quantity of carbon offsets to completely offset its initially low level of emissions and become carbon neutral. However, this 100% reduction in emissions is far less economically meaningful than a brown firm reducing its emissions by a mere 1%'.

Skip the Green Firms?

The authors find that rather than focusing investments on green firms, investors could have more impact on the amount of emissions as “sustainable investing flows and engagement … would be more effective if targeted at brown firms.”


bottom of page