Welfare Consequences of Sustainable Finance

In lieu of carbon taxes to address global warming, sustainable investment mandates are proposed to incentivize firms to achieve net-zero emissions. With underspending on mitigation due to externalities, we model the welfare consequences of these investments in firms that qualify by spending enough on decarbonization technologies. Our dynamic stochastic general equilibrium model generates several testable predictions. A cost-of- capital wedge between qualified and unqualified firms equals firm mitigation divided by its Tobin's q. Given projections of global warming and cost of decarbonization technologies, we calculate the mandate size and cost-of-capital wedge needed to meet net-zero targets.