BIS Working Papers No 1127 The impact of green investors on stock prices by Gong Cheng, Eric Jondeau, Benoit Mojon and Dimitri Vayanos Monetary and Economic Department September 2023 JEL classification: G12, G23, Q54. Keywords: Asset pricing, green investing, passive investing, portfolio rebalancing. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2023. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) The Impact of Green Investors on Stock Prices∗Gong Cheng1, Eric Jondeau2, Benoit Mojon1, and Dimitri Vayanos31Bank for International Settlements2HEC Lausanne and Swiss Finance Institute3London School of EconomicsSeptember 18, 2023AbstractWe study the impact of green investors on stock prices in a dynamic equilibrium asset-pricing model where investors are green, passive or active. Green investors track anindex that excludes progressively the firms with the highest greenhouse gas emissions.Active investors maximize expected returns and can buy stocks of brown firms whereaspassive investors hold an index of the entire market. Contrary to the literature, we finda large fall in the stock prices of the high-emitting firms that are excluded and in turn anincrease in stock prices of greener firms when the exclusion strategy is announced andduring the transition process. The immediate and large effects at the announcementdate yield a first-mover advantage to green investors that adopt the decarbonizationstrategy early. This large price impact comes from the imperfect substitution of stocksamong investor populations. A smaller size of active investors relative to green investorsamplifies the price impact of green investment.JEL: G12, G23, Q54Keywords: Asset pricing, green investing, passive investing, portfolio rebalancing∗We thank the participants in the BIS Research Meeting and the NGFS Expert Network on Research webi-nar series for their constructive comments. We thank Jingtong Zhang for research assistance. The authors’contact:gong.cheng@bis.org,eric.jondeau@unil.ch,benoit.mojon@bis.org,d.vayanos@lse.ac.uk.The views presented in this paper are those of the authors and do not necessarily reflect those of the Bankfor International Settlements. 1 IntroductionIn the fight against climate change, the role of financial asset owners and managers is widelydebated. As large institutional investors are investing in financially diversified portfolios,they hold shares of firms with high greenhouse gas (GHG) emissions and thus contributeto global warming by financing polluting activities. There have been an increasing numberof corporate initiatives to promote net zero investment in recent years. Central Banks,through their Network for Greening the Financial System (NGFS), have also been reflectingon greening central banks’ investment portfolios. Two broad approaches prevail. Investorscan either divest from the brownest firms or influence the transition of those firms to greeneroperations through their votes at annual general meetings.A key question that drives investors’ consideration of these two net zero investment strate-gies concerns whether exclusion or divestment effectively raises the cost of capital of brownfirms versus green firms and thereby influences brown firms’ future business development. Inparticular, shares sold by green investors will be bought by less climate-conscious investors.As a result, the impact of divestment on stock prices will depend on the willingness of theseother investors to absorb additional brown stocks. If there are few green investors, then theprice impact will be small (Berk and van Binsbergen, 2022). If, however, the community ofgreen investors is growing to sell off brown stocks, then the counterparts of green investorsmay require a significant price discount to buy these stocks.The main objective of the paper is to evaluate the impact on stock prices of institutionalinvestors reducing their exposure to firms with the highest GHG emissions. We considerthree categories of investors. Passive investors or indexers track the market portfolio andrepresent the mass of non-green passive institutional investors. Green investors also tracka benchmark but this benchmark progressively excludes brown firms. The most pollutingfirms are excluded first from the green benchmark and every year an additional set of firms,based on their carbon emissions