NEW YORK, NY – Companies adopting greener business practices is key to ending the climate crisis, but motivating firms to “go green” is a challenge. Many speculate that sustainable investing, which has surged well into the trillions since the 2016 Paris Agreement, has motivated companies to implement more sustainable business practices. But over the last decade, it has been difficult to evaluate whether this boom has actually lowered companies’ “cost of capital,” or in other words, changed their perception of how financially attractive green investments are. A first-of-its-kind study from Columbia Business School offers fresh evidence that since the rise of sustainable investing post-2016, the perceived cost of capital has significantly decreased for firms that actively reduce their footprint, compared to their more polluting peers. Major energy and utility companies like Shell and BP are also using lower costs of capital for their renewable energy divisions, overall suggesting that green business practices are becoming more financially viable.
For the study, Climate Capitalists, Professor Simon Oh, Assistant Professor of Business at Columbia Business School, and co-authors Niels Gormsen and Kilian Huber from the University of Chicago's Booth School of Business, analyzed quarterly earnings calls from US and European firms between 2002 and 2023. Using ESG scores from Morgan Stanley Capital International, they categorized these companies as “green” and “brown”— those that actively seek to reduce their environmental impact versus those that are less likely to consider their environmental impact. Their theoretical model analyzes how lower cost of green capital shifts companies’ spending toward green investments both within companies (i.e., towards green projects) and across them. Their cross-company analysis shows that since 2016, “green” companies now have a significantly lower perceived cost of capital—1 whole percentage point—compared to “brown.” Within companies, they find that major energy and utility companies are using lower costs of capital for their greener divisions like renewable energy. They also find that sectors with a larger spread between green and brown capital costs have committed to larger emission reductions.
As green investors decide where to put their money and the climate space seeks new ways to transition to a green economy, these findings suggest that lowering the cost of capital required for green investments is a promising way to encourage companies to adopt greener business practices.
