A fundamental concern about green investing is that it may crowd out political support for public policies addressing negative externalities. We examine this concern in a preregistered experiment conducted shortly before a real referendum on a climate law in Switzerland. We find that offering an opportunity to invest in a climate-friendly fund does not reduce individual support for climate regulation, measured by political donations and voting intentions. A replication of the experiment in the United Kingdom yields similar results. Our estimates reject a crowding-out effect, suggesting instead a modest crowding-in effect of green investing on political support for green policies.

During the COVID-19 stock market crash, U.S. stocks with higher institutional ownership (IO) performed worse than those with lower IO. By studying firm-level changes, we identify two mechanisms behind this effect: a sudden downscaling of institutional capital in the equity market and a collective attempt by institutions to reposition their equity portfolios toward more COVID-resilient stocks. The stock price effects of their “portfolio downscaling” trades quickly reversed in the market’s recovery phase, whereas those of their “portfolio repositioning” trades lingered. The institutional rush for firm resilience also caused price pressures, with retail investors providing liquidity to stocks sold by institutional investors, both during the crisis and afterward. Overall, our results indicate that when a tail risk is realized, institutional investors amplify price crashes. This paper was accepted by Lukas Schmid, finance. Funding: S. Glossner and P. Matos acknowledge financial support from the Richard A. Mayo Center for Asset Management at the Darden School of Business. S. Ramelli and A. F. Wagner acknowledge financial support from the University of Zurich Research Priority Program “Financial Market Regulation.” Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03411 .

We study an overlooked driver of heterogeneity in green investment behavior, differences in expectations about the long-term trajectory of the energy transition (climate transition beliefs). In a representative survey of U.S. retail investors, we document considerable heterogeneity in climate transition beliefs at different long-term horizons. Transition optimism is positively associated with expected green financial performance and preferences for green investments, particularly among investors without strong proenvironmental attitudes. Two pre-registered experiments provide causal evidence that transition beliefs play a key role in shaping green return expectations and investment decisions. Distinguishing between heterogeneous beliefs and preferences is crucial for better understanding the motivations behind green investment behavior.

A first-order concern regarding sustainable finance is that it may crowd out individual support for more effective, policy-driven approaches to address societal challenges.We test the validity of this concern in a pre-registered experiment in the context of a real referendum on a climate law with a representative sample of the Swiss population (N=2,051).We find that the opportunity to invest in a climate-conscious fund does not erode individuals' support for climate regulation.While sustainable finance may resemble a placebo in the sense that individuals appear very optimistic about its societal impact, it is not a dangerous placebo that crowds out political engagement.

Inflation can significantly undermine companies' relationships with their customers, employees, and other stakeholders, spawning a crisis of trust. This is particularly true in a period when many citizens accuse corporations of excessively raising prices to maximize profits. Studying the cross-sectional reactions of US stocks to inflation over the period 2018-2022, we find that in the month following a higher inflation rate, equity investors reward firms with stronger social capital, as proxied by their corporate social responsibility levels. The effect holds using different measures of inflation, including region-specific ones. The inflation-hedging property of CSR is stronger for firms headquartered in Democratic US states (those most exposed to the "corporate greed'' narrative of inflation) and for firms with higher customer awareness and intangible capital. Overall, the findings spotlight inflation as a crisis in stakeholder trust and provide new insights into the importance of social capital for firm value.

What do asset managers believe regarding the financial performance of Environmental, Social, and Governance (ESG) investment strategies? We address this question by exploring the relationship between fund managers’ co-ownership and portfolio ESG performance. Managers with more “skin in the game” exhibit significantly lower ESG performance in funds they manage than their peers. ESG performance is sensitive to changes in managerial ownership. Co-investing managers were less likely to increase their stake in high-ESG stocks after an exogenous shock in ESG-driven fund flows. Moreover, the negative effect of managerial ownership on ESG performance is stronger for managers paid to maximize assets under management, and weaker for managers paid exclusively to maximize financial returns. Overall, the results are contrary to what one would expect if managers really considered ESG strategies an enhanced form of portfolio management.

The first Global Climate Strike on March 15, 2019, represented a historical turning point in climate activism. We investigate the cross-section of stock price reactions to this event for a large sample of European firms. The strike's unanticipated success caused a decrease in the stock prices of carbon-intensive firms. The effect appears to be driven by the increased public attention to climate activism. Furthermore, after the first Global Climate Strike financial analysts downgraded their longer-term earnings forecasts on carbon-intensive firms.

Donald Trump's 2016 election and the subsequent nomination of Scott Pruitt, a climate skeptic and self-proclaimed opponent of the Environmental Protection Agency's activist agenda, to lead the EPA drastically shifted expectations on US climate change policy. Firms' stock-price reactions to these events reveal whether their climate strategies affected their valuations. As widely reported, firms in industries with high carbon intensity benefited, at least briefly. It might be expected that companies with responsible strategies on climate change would have lost value. In fact, investors actually rewarded such firms. The analysis shows that this observed climate responsibility premium is due, at least in part, to the strategic behavior of long-horizon investors who look into the future to assess the valuation of corporations.

In this paper, we propose a new method to estimate non-fundamental demand shocks for green financial assets based on the arbitrage activity of exchange-traded funds (ETFs). By estimating the monthly abnormal flows into environment-friendly ETFs, we construct a Green Sentiment Index that captures shifts in investors' appetite for environmental responsibility that are not yet priced in the value of the underlying assets. Our measure of green sentiment differs significantly from the news-based climate indexes proposed by the extant literature, and it has additional explanatory power on both stock returns and corporate decisions. Over the period 2010-2020, shifts in green sentiment anticipate a persistent stock-price out-performance of more environmentally responsible firms, (of approximately 53 basis points over six months for a one-standard-deviation higher green sentiment) as well as an increase in their capital investments and cash holdings, particularly for more equity-dependent ones.

We analyze the portfolio choices of approximately 913,000 active participants in employee saving plans in France. Looking at the cross-section of equity exposure, we find that the inclusion of responsible equity options in the menu of available funds is associated with a 2.1% higher equity allocation by plan participants. Compared to an average equity asset allocation of 12.1%, it represents a material increase (17% in relative terms). Difference-in-differences analyses confirm that the introduction of a responsible equity option to a saving plan is followed by an increase of 7.2% in participants' appetite for stocks, contrary to what happens with conventional equity funds.

In April 2018, the investment platform and financial advisor Morningstar introduced a new eco-label for mutual funds, the Low Carbon Designation (LCD). The unexpected release of this label induced responses by (1) investors and (2) mutual funds. First, investors flocked to funds labeled as Low Carbon. Through the end of 2018, such funds enjoyed a 3.1% increase in assets compared to otherwise similar funds. This effect was distinct from that of more generic sustainability ratings (Globes), and it reversed for funds that lost the label in August or November 2018. Second, managers of just-missing funds adjusted their holdings towards lower carbon risk and lower fossil fuel involvement, the two criteria used to assign the LCD. Both the rewards-for-LCD and the moving-towards-LCD effects are stronger for European funds, retail funds, funds with weak financial performance, and low-sustainability funds. Overall, the findings suggest that as investors become more sensitive to the topic of climate change, financial intermediaries also use existing investment vehicles to respond to the increasing demand for climate-conscious investment products.

When disaster strikes, the weak suffer mightily, the strong only slightly. That is the lesson from stock market reactions to COVID-19. Strong firms had a robust financial position, advanced environmental and social performance, and were not severely exposed to social distancing and lockdowns. Firms with significant international exposure suffered more, at least at first. The ultimate effects of policy interventions, including those by central banks, have yet to be revealed. The market recovery in the second quarter of 2020 is like a patient recovering from COVID-19: hopeful but still uncertain. Managers and policymakers should project the future with great caution.

Market reactions to the 2019 novel coronavirus disease (COVID-19) provide new insights into how real shocks and financial policies drive firm value. Initially, internationally oriented firms, especially those more exposed to trade with China, underperformed. As the virus spread to Europe and the United States, corporate debt and cash holdings emerged as important value drivers, relevant even after the Fed intervened in the bond market. The content and tone of conference calls mirror this development over time. Overall, the results illustrate how anticipated real effects from the health crisis, a rare disaster, were amplified through financial channels.

During the COVID-19 crash, U.S. stocks with higher institutional ownership performed worse. By studying firm-level changes in institutional ownership, we identify two mechanisms behind this effect: A sudden withdrawal of capital from the equity market and the collective attempt to re-position equity portfolios toward more COVID-resilient stocks. The stock-price effects of ``portfolio downscaling'' trades quickly reversed in the market's recovery phase, while those of ``portfolio repositioning'' trades lingered. The institutional rush for firm resilience also caused price pressures. Retail investors acted as counterparts and provided liquidity to stocks institutional investors sold, both during the turmoil and afterward. Overall, the results indicate that when a tail risk realizes, institutional investors amplify price crashes.

Market reactions to the 2019 novel coronavirus disease (COVID-19) provide new insights into how real shocks and financial policies drive firm value. Initially, internationally oriented firms, especially those more exposed to trade with China, underperformed. As the virus spread to Europe and the United States, corporate debt and cash holdings emerged as important value drivers, relevant even after the Fed intervened in the bond market. The content and tone of conference calls mirror this development over time. Overall, the results illustrate how anticipated real effects from the health crisis, a rare disaster, were amplified through financial channels.

Donald Trump's election and his nomination of Scott Pruitt, a climate skeptic, to lead the Environmental Protection Agency drastically downshifted expectations on US climate-change policy. We study firms' stock-price reactions and institutional investors' portfolio adjustments after these events. As expected, carbon-intensive firms benefited. Should not companies with responsible strategies on climate change have lost value, since they were paying for actions that were now less urgent? In fact, investors actually rewarded such firms. The premium the firms received resulted, at least in part, from the move into climate-responsible stocks by long-horizon investors presumably expecting a post-Trump rebound to green policy.

Even in a climate-adverse political context, the stock market rewards responsible firms. The case for climate investment remains strong.