The impact of green investors on stock prices by OECD

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

n , where k(t)= k if t ∈ [kT , (k +1)T )for k =0,.., K ′ − 1, K ′ if t ∈ [K ′T , ∞).

1+µIt λIt +µGt λGt 1{m≤(K k(t))N} µ

−

Gt λ

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m=1

1+µIt

It +µ

G 1{n≤(K k(t))N}

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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