The Impact of Green Investors on Stock Prices

We study how green investors impact firms’ stock prices and cost of capital in a model where they track an index that progressively excludes the brownest firms and trade with passive investors tracking a broad index and with active investors. Because stock demand elasticity is low with passive investors, the impact of green investors is significantly larger than in previous calibrations. That impact is further amplified when the brownest firms load heavily on climate transition risk. Although an announcement of future exclusion is reflected into brown firms’ current prices, the future price decline until exclusion is significant.

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This is a revised version of May 2025. The previous version was dated March 2024.