Sustainable Investing, Information, and Real Effects

Sustainable investing considers not only financial objectives but also environmental, social, and governance (ESG) criteria. This investment approach has gained spectacular popularity in the last decade, with assets managed with an eye on sustainability reaching tens of trillions of dollars and continues to grow. Many commentators and policy makers view sustainable investing as an important conduit to finance and foster the transition towards a more sustainable economy. The underlying idea is that, through the integration of sustainable objectives, investors can collectively induce firms to pursuing more social and environment goals (i.e., internalize part of the negative externalities they impose of society).In recent years, an important research effort has developed to examine whether and how sustainable investing can affect firms' real decisions and leads them to become more sustainable. Existing theoretical and empirical studies have mainly focused on whether sustainable investors can impact firms' actions by (i) excluding them from their portfolios (the so-called ``exclusion'' channel) or (ii) exerting pressure through activism (the ``engagement'' channel). In this project, I propose another potential (and overlooked) channel of impact related to the effect of sustainable investing on the production of information in financial markets. Indeed a large literature (surveyed below) establishes that financial markets generates relevant information about future economic fundamentals (i.e., firms' future payoffs), and that, in turn, this information affects corporate managers and guide their firms' investment decisions. Therefore it is plausible that the rise of sustainable investing alters the information production function of financial markets (maybe leading to information inefficiencies and frictions), and its real effects on the corporate sector. The goal of this proposal is thus to study the links between sustainable investing and (i) the type and quantity of information produced by financial markets, and (ii) the effects of market-generated information on firms' real decisions. To do so, this proposal is articulated around two parts. The main objective of part 1 is to measure whether and how stock prices embeds information about non-monetary components of firms' future payoffs (e.g., related to their environmental or social practices), and the association with sustainable investing. We propose to do so by developing an empirical methodology designed to specifically measure the informational content of prices about non-monetary future payoffs, and to assess how this specific informativeness relates to the activity of (and information available to) sustainable investors. The main objective of Part 2 is to explore the interplay between sustainable investing, the informativeness of firms' stock prices, and various corporate decisions. The goal is to identify for the first time (i) if firms' decisions related to environmental and social dimensions are influenced by information contained in their stock prices, (ii) whether sustainable investors alter the influence of stock prices, and (iii) quantify the resulting gain (or loss) in environmental and social efficiency/objectives.