Climate Capitalists

Climate change has raised the question of how to incentivize green investments by firms even when the returns to green investments are low relative to emission-intensive investments. In theory, a cost of capital channel can raise green investments similarly to a carbon tax even when the returns remain unchanged. The potential of this channel depends on whether firms perceive that the cost of green capital is lower than that of brown capital. Using hand-collected data, we show that green and brown firms perceived their cost of capital to be the same before 2016. Once climate concerns by financial investors and governments surged after 2016, green firms perceived their cost of capital to be on average 1 percentage point lower. Moreover, some of the largest energy and utility firms have started applying a lower cost of capital to greener divisions. The findings suggest that the cost of capital channel can incentivize the reallocation of capital toward greener investments across firms and within firms.