TheImpactofGreenInvestorsonStockPrices∗
GongCheng 1 EricJondeau 2 BenoitMojon 1 DimitriVayanos 3
1 BankforInternationalSettlements
2 HECLausanneandSwissFinanceInstitute
3 LondonSchoolofEconomics
NAVIGATINGTHEPATHTONETZERO:
THEINTERPLAYOFCLIMATE,MONETARYANDFINANCIALPOLICIES
ECB-OECDWORSHOP,PARIS,19APRIL2024
∗ Theviewspresentedhereafterarethoseoftheauthors’anddonotnecessarilyrepresentthoseoftheBankforInternationalSettlements.Wethank JingtongZhangforresearchassistance.
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Motivation
Greeninvestmentisgrowingeithertohedgecarbonriskorforimpact investing.
CentralBanksas”investors”,NGFSWSonNetZeroinvestmentstrategies CBs
Exclusionanddivestment
Engagementandvoting
Greenbondinvestment
Greeninvestorstrackgreenindices:
Staticindices,excludebrownstocks
Dynamic”NZindices”,excludeincreasingfractionofbrownstocksovertime (e.g.,GreenS&P500Paris-alignedindex)
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Researchquestion
Whatisthepriceimpactofgreeninvestors’exclusionstrategy?
Howbigisit?
Wheredoestheeffectcomefrom?
Doestimingmatter?Isthereafirst-moveradvantageofgoinggreen?
Wedevelopacalibrateddynamicequilibriummodeltoanswerthese questions.
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ModelSketch
Threetypesofinvestors.
Activeinvestors.Holdoptimalmean-varianceportfolio
Passiveindexers.Holdmarketindex.
Trueindexers
Activeinvestorswithtighttracking
Inattentiveinvestors
Greeninvestors.Holdgreendynamicindex.
Calibrateddynamicequilibriummodel.
ExtendsBuffa-Vayanos-Woolley(JPE2022)andJiang-Vayanos-Zheng(2023).
Threesourcesofrisk:
Systematic,business-cycle
Systematic,climate(transition)
Idiosyncratic
Equilibriumpricesareaffineinstatevariables.
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Modelillustration
Restricted 012…t 012…t Green investors' portfolio
Active investors' portfolio Selling brown stocks
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Buying green stocks
MainResults
Priceimpactofgreeninvestorscanbesizeable.
30%greeninvestors,20%activeand50%passiveindexersofthemarket brownest10%ofstocksareexcludedgraduallyfromgreenindexover10years
Costofcapitalofexcludedfirmsrisesby20bps
Priceofexcludedfirmsdropsby5.6%
Fractionofgreentoactiveinvestorsiskey.
Thebiggerthesizeofgreeninvestorsrelativetoactiveinvestors,thelarger thepriceimpact.
Thepriceimpactrisesto12%iftheratioofgreentoactiveinvestorsincrease from3/2to4/1.
First-moveradvantageforgreeninvestors.
Mostofthepriceimpactanticipatedduetoperfectforesight
Firstmovershedgefrompricedropofbrownstocks
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RelatedLiterature
Net-zerocarbonportfolios. Jondeau-Mojon-PereiraDaSilva(2021),Cheng-Jondeau-Mojon (2022),Bolton-Kacperczyk-Samama(FAJ2022).
Demandshocksandassetprices.
Passiveinvestingandbenchmarking. Brennan(1993),Kapur-Timmermann(EJ2005), Cuoco-Kaniel(JFE2011),Basak-Pavlova(AER2013),BenDavid-Franzoni-Moussawi(JF2018), Buffa-Vayanos-Woolley(JPE2022),Davies(2023),Jiang-Vayanos-Zheng(2023).
Generalmethodologies. Koijen-Yogo(JPE2019),Gabaix-Koijen(2022), Haddad-Huebner-Loualiche(2022),Koijen-Richmond-Yogo(2022).
Priceimpactofgreeninvestors. Pedersen-Fitzgibbons-Pomorski(JFE2020),PastorStambaugh-Taylor(JFE2021),Papoutsi-Piazzesi-Schneider(2022), Berk-VanBinsbergen(2023), HartzmarkandShue(2023).,Broccardo-Hart-Zingales(JPE)
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Roadmap
Introduction ✓
Model Calibration Results
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Model
Assets
Time t goesfromzerotoinfinity.
Risklessrate r > 0.
KN firms. K groupsof N firmseach.
Greenindexexcludesallfirmsingroup K inYear1,group K 1inYear2, etc,andgroup K − K ′ +1inYear K ′ < K .
Carbonemissions(unmodelled)increasein k =1,.., K .
Stock n =1,.., KN .Supply ηn shares.Per-sharedividendflow
Dnt = ¯ Dn + bs nD s t + bc n D c t + D i nt ,
D s t :Business-cyclefactor.Loading bs n .
D c t :Climatefactor.Loading bc n .
D i nt :Idiosyncratic.
Statevariables(D s t , D c t , D i nt )followsquare-rootprocesses. Tractablespecification.
Dividendsandpricesalwayspositive.Volatilitypershareincreaseswith dividendlevel.
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Agents
Activeinvestors,measure µAt .
Maximizemean-varianceutility
Et (dWAt ) ρ 2 Vart (dWAt ).
Investinrisklessassetandinstockswithoutconstraints.
Indexers,measure µIt .
Investinrisklessassetandinvalue-weightedindex(ηn sharesofstock n).
Chooseinvestment λIt inindextomaximizemean-varianceutility,in
expectationover D s t , D c t , D i nt n=1,..,KN .
Greeninvestors,measure µGt .
Sameasindexersbutwithgreenindex.
Chooseinvestment λGt ingreenindex.
(µIt ,µGt ,λIt ,λGt )assumedconstantwithineachyearbutcanchangeacross years.
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EquilibriumPrices
Proposition: Stockpriceoffirm n isaffinein {D j t }j=s ,c and D i nt : Snt = ¯ Dn r
PVofconstant component + j=s ,c bj n(aj 0t + aj 1t D j t )
PVofsystematic component + ai n0t + ai n1t D i nt
PVofidiosyncratic component .
Affinecoefficients {aj 1t }j=s ,c , ai n1t and j=s ,c bj naj 0t + ai n0t aredeterministic functionsoftime. Theydependon:
Systematicnetdemand
m bj m for j = s, c, Idiosyncraticnetdemand
At
n , where k(t)= k if t ∈ [kT , (k +1)T )for k =0,.., K ′ − 1, K ′ if t ∈ [K ′T , ∞).
KN
1+µIt λIt +µGt λGt 1{m≤(K k(t))N} µ
η
−
λ
Gt λ
µ
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m=1
At
1+µIt
It +µ
G 1{n≤(K k(t))N}
η
Calibration
ParameterValues
KN =500stocks.
K =100groupsof5stockseach. K ′ =10.
Exclude1%ofmarketeachyearfromYear1toYear10.
Robustness:Exclude2%ofmarketeachyearfor10years(K =50groupsof 10stockseach).
Stocksaresymmetricexceptpossiblyinclimateriskloadings.
Chooseremainingparameterstomatch:
Expectedexcessreturns=4.5-5%.(Numberofshares,riskaversion)
CAPM R 2 =20-25%.(Systematicvs.idiosyncraticrisk)
Reportunconditionalmoments(expectationsover {D j t }j=s ,c and D i nt ).
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Simulationscenarios
GreeninvestorsActiveinvestorsIndexersClimateriskfactor Scenario1 µG =30% µA =20% µI =50% bc n =0 Scenario2 µG =30% → 60% µA =20% µI =50% → 20% bc n =0 Scenario3 µG =30% → 60% µA =20% µI =50% → 20% bc n > 0 15/25
Results
Scenario1,30%GreenInvestors:Effectsonstockprices
Effectofexclusiononpriceis ≈ 5-6%bytheendofthetransitionperiod.
Mostofeffectisanticipated.
PanelA:Effectofexclusiononstockprices
0 5 10 year 7.2 7.25 7.3 7.35 7.4 7.45 7.5 7.55 7.6 7.65 7.7
0 5 10 year 7.2 7.25 7.3 7.35 7.4 7.45 7.5 7.55 7.6 7.65 7.7 Price(excl.inyear10) 0 5 10 year 7.2 7.25 7.3 7.35 7.4 7.45 7.5 7.55 7.6 7.65 7.7 Price(notexcluded) 17/25
Price(excl.inyear1)
Exclusionincreasestheexpectedreturnsofexcludedstocksby ≈ 18bp.
PanelB:Effectofexclusiononexpectedreturns
Scenario1,30%GreenInvestors:effectsonthecostof capital
0 5 10 year 4.74 4.76 4.78 4.8 4.82 4.84 4.86 4.88 4.9 4.92 4.94 E(R)(excl.inyear1) 0 5 10 year 4.74 4.76 4.78 4.8 4.82 4.84 4.86 4.88 4.9 4.92 4.94 E(R)(excl.inyear10) 0 5 10 year 4.74 4.76 4.78 4.8 4.82 4.84 4.86 4.88 4.9 4.92 4.94 E(R)(notexcluded) 18/25
Scenario1,30%GreenInvestors:Mainresults
FirmsexcludedFirmsexcludedNon-excluded inYear1inYear10firms
∆Priceat t =0-5.4%-3.9%0.60%
∆Priceat t =10-5.6%-5.6%0.71%
∆Costofcapitalat t =00.13%0.11%-0.01%
∆Costofcapitalat t =100.18%0.18%-0.02%
CAPM β at t =01.191.181.14
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ComparisonwithBerk-VanBinsbengen(2023)
BV:Costofcapitalofbrownminusgreen=0.0044%.Tinyeffect.
Greeninvestorsare2%ofmarket
Remaining98%areactiveinvestors
Correlationbetweenbrownportfolio(27%ofmarket)andgreenportfolio (remaining73%)is93%
CJMV:Costofcapitalofbrownminusgreen=0.27%.60timeslarger.
Greeninvestorsare30%ofmarket.
Activeinvestorsarenotremaining70%: 20%activeand50%indexers
Correlationbetweenbrownportfolio(10%ofmarket)andgreenportfolio (remaining90%)is96%
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ComparisonwithBerk-VanBinsbengen(2023)
Figure: Priceimpactofchangingtherelativeshareofgreenandactiveinvestors
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Scenario2:GreenInvestors30%
Effectsapproximatelydouble.
FirmsexcludedFirmsexcludedNon-excluded inYear1inYear10firms
∆Priceat t =0-8.9%-7.0%1.2%
∆Priceat t =10-9.9%-9.9%1.4%
∆Costofcapitalat t =00.22%0.20%-0.03%
∆Costofcapitalat t =100.34%0.34%-0.04%
CAPM β at t =01.221.211.14
→ 60%
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Loadingsonclimatefactorfollowpowerlawacrossgroups.
1%(10%)ofbrowneststocksaccountfor15%(40%)ofaggregateloading
Identifyloadingswithemissions(Jondeau-Mojon-PereiraDaSilva,2021)
Climateriskiscalibratedbasedoncostofcapitalofbrownminusgreen inthe absenceofgreeninvestors.Differenceis0.36%
EffectsarelargerthaninScenario2
Intuition:Portfolioofactiveinvestorsloadsonclimaterisk
Scenario3:GreenInvestors30% → 60%andClimateRisk
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FirmsexcludedFirmsexcludedNon-excluded inYear1inYear10firms
∆Priceat t =0-12.5%-6.2%0.91%
∆Priceat t =10-14.6%-8.8%1.10%
∆Costofcapitalat t =00.36%0.14%-0.02%
∆Costofcapitalat t =100.68%0.29%-0.02%
CAPM β at t =01.601.171.09
Scenario3:GreenInvestors30% → 60%andClimateRisk
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Priceimpactofgreeninvestorscanbesizeable. Imperfectsubstitutionbetweenbrownandgreenassetsisintroducedthrough threetypesofinvestors.
Fractionofactiveinvestorsrelativetogreeninvestorsisthuskey:effects doublewhenmeasureofactiveinvestorshalves.
Avenuesforfurtherwork:
First-moveradvantageforgreeninvestors
Thefeedbackloopbetweencostofcapital,dividendsandfutureinvestment decisions
Conclusion
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