Climate Capitalists

Climate change has raised the question of how to incentivize green investments by firms even though carbon taxes are low and high-emissions projects remain profitable. In theory, the cost of capital channel can raise green investments even if the returns to green investments do not improve. The potential of this channel depends on whether firms perceive that the cost of green capital is lower. 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. These changes in the perceived cost of green capital incentivize the reallocation of capital toward greener investments across firms and within firms.