Green investors and corporate investment

Green or socially responsible investing (SRI) refers to making investment decisions according to both financial and ethical criteria. This paper explores the effects of ethical screening on the investment decisions of firms that fail the screen ('polluting' firms) and on their decisions to reform so as to pass the screen. These issues are examined in an equilibrium setting with endogenous investment decisions and endogenous future outputs. We find that green investors can induce polluting firms to reform and that SRI results in under-investing by polluting firms, which leads to lower total investment in the economy.