Hostname: page-component-76d6cb85b7-pn7tm Total loading time: 0 Render date: 2026-07-15T09:55:29.343Z Has data issue: false hasContentIssue false
  • English
  • Français

Climate-Triggered Institutional Price Pressure: Does It Affect Firms’ Cost of Equity?

Published online by Cambridge University Press:  03 November 2025

George Skiadopoulos  and
Cheng Xue Open the ORCID record for Cheng Xue [Opens in a new window]
George Skiadopoulos
Affiliation:
University of Piraeus, Department of Banking and Financial Management Queen Mary University of London, School of Economics and Finance gskiado@unipi.gr, g.skiadopoulos@qmul.ac.uk
Cheng Xue*
Affiliation:
Nanjing Agricultural University, College of Finance
*
chengxue@njau.edu.cn (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We document that climate-triggered institutional portfolio rebalancing affects S&P 500 firms’ cost of equity through climate change price pressure (CCPP). Using a demand-based asset pricing framework, we estimate firm-level CCPP from physical and transition exposures over 2005–2021. A one-standard-deviation intensification of CCPP raises the cost of equity by up to 6% of its average, with banks and insurers as the main drivers. Yet firms do not subsequently improve environmental performance, indicating that the statistically significant effect of CCPP on cost of equity is ineffective to alter corporate behavior. Our CCPP metrics can help policymakers and investors design targeted environmental strategies.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 61 , Issue 4 , June 2026 , pp. 1695 - 1722
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

We are grateful to two anonymous referees and Ran Duchin (the editor) for their constructive, stimulating, and thorough comments. We thank Vimal Balasubramaniam, Ioannis Branikas, Lorenzo Bretscher (discussant), Nelson Camanho, Stefanos Delikouras, Ioannis Floros, Emmanuel Guerre, Emirhan Ilhan, Miao Liu (discussant), Tina Mavraki, Ioannis Moustakis, Don Noh, Filippos Papakonstantinou, Dimitris Papanikolaou, Panos Patatoukas, Ilaria Piatti, Chardin Wese Simen, George Skoulakis, Luke Taylor, Grigory Vilkov, Alexander Wagner, Bin Xu, Olivier David Zerbib, and participants at CRETE 2024, EFMA 2024, Frontiers of Factor Investing 2024 Conference, ICMA Doctoral Finance Symposium, IFABS 2024, International Conference on Empirical Economics 2024, SGF 2025, and Robeco Internal Research Seminar for useful discussions and comments. We also thank Alessio Lombini for his excellent research assistance. This work has been partly supported by the University of Piraeus Research Center. We have used AI tools for copy editing. All authors contributed equally to the work.

This article has been updated since original publication. A notice detailing the change has been published.

References

Alok, S.; Kumar, N.; and Wermers, R.. “Do Fund Managers Misestimate Climatic Disaster Risk.” Review of Financial Studies, 33 (2020), 1146–1183.CrossRefGoogle Scholar
Atta-Darkua, V.; Glossner, S.; Krueger, P.; and Matos, P.. “Decarbonizing Institutional Investor Portfolios: Helping to Green the Planet or Just Greening your Portfolio?” Working Paper, University of Virginia (2023).Google Scholar
Azar, J.; Duro, M.; Kadach, I.; and Ormazabal, G.. “The Big Three and Corporate Carbon Emissions Around the World.” Journal of Financial Economics, 142 (2021), 674–696.CrossRefGoogle Scholar
Bauer, R.; Ruof, T.; and Smeets, P.. “Get Real! Individuals Prefer More Sustainable Investments.” Review of Financial Studies, 34 (2021), 3976–4043.CrossRefGoogle Scholar
Berg, F.; Heeb, F.; and Kölbel, J. F.. “The Economic Impact of ESG Ratings.” Working Paper, Massachusetts Institute of Technology (2022).Google Scholar
Berk, J. B., and van Binsbergen, J. H.. “The Impact of Impact Investing.” Journal of Financial Economics, 164 (2025), 103972.CrossRefGoogle Scholar
Bolton, P., and Kacperczyk, M.. “Do Investors Care about Carbon Risk?” Journal of Financial Economics, 142 (2021), 517–549.CrossRefGoogle Scholar
Broccardo, E.; Hart, O.; and Zingales, L.. “Exit Versus Voice.” Journal of Political Economy, 130 (2022), 3101–3145.CrossRefGoogle Scholar
Chabi-Yo, F.; Dim, C.; and Vilkov, G.. “Generalized Bounds on the Conditional Expected Excess Return on Individual Stocks.” Management Science, 69 (2023), 922–939.CrossRefGoogle Scholar
Cheng, G.; Jondeau, E.; Mojon, B.; and Vayanos, D.. “The Impact of Green Investors on Stock Prices.” Review of Finance, forthcoming (2025).Google Scholar
Choi, D.; Gao, Z.; Jiang, W.; and Zhang, H.. “Carbon Firm Devaluation and Green Actions.” Working Paper, The Chinese University of Hong Kong (2024).Google Scholar
Cohen, L.; Gurun, U. G.; and Nguyen, Q. H.. “The ESG-Innovation Disconnect: Evidence from Green Patenting.” NBER Working Paper No. 27990 (2020).Google Scholar
Dimson, E.; Karakaş, O.; and Li, X.. “Coordinated Engagements.” Working Paper, European Corporate Governance Institute (2023).Google Scholar
Duchin, R.; Gao, J.; and Xu, Q.. “Sustainability or Greenwashing: Evidence from the Asset Market for Industrial Pollution.” Journal of Finance, 80 (2025), 699–754.CrossRefGoogle Scholar
Edmans, A.; Gosling, T.; and Jenter, D.. “Sustainable Investing: Evidence from the Field.” Working Paper, European Corporate Governance Institute (2025).Google Scholar
Edmans, A.; Levit, D.; and Schneemeier, J.. “Socially Responsible Divestment.” Working Paper, European Corporate Governance Institute (2023).Google Scholar
Faccini, R.; Konstantinidi, E.; Skiadopoulos, G.; and Sarantopoulou-Chiourea, S.. “A New Predictor of U.S. Real Economic Activity: The S&P 500 Option Implied Risk Aversion.” Management Science, 65 (2019), 4927–4949.CrossRefGoogle Scholar
Faccini, R.; Matin, R.; and Skiadopoulos, G.. “Dissecting Climate Risks: Are they Reflected in Stock Prices?” Journal of Banking and Finance, 155 (2023), 106948.CrossRefGoogle Scholar
Fernando, C. S.; Sharfman, M. P.; and Uysal, V. B.. “Corporate Environmental Policy and Shareholder Value: Following the Smart Money.” Journal of Financial and Quantitative Analysis, 52 (2017), 2023–2051.CrossRefGoogle Scholar
Gabaix, X., and Koijen, R. S. J.. “In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis.” NBER Working Paper No. 28967 (2022).Google Scholar
Gantchev, N.; Giannetti, M.; and Li, R.. “Does Money Talk? Divestitures and Corporate Environmental and Social Policies.” Review of Finance, 26 (2022), 1469–1508.CrossRefGoogle Scholar
Gibson, R.; Krueger, P.; and Mitali, S. F.. “The Sustainability Footprint of Institutional Investors: ESG Driven Price Pressure and Performance.” Working Paper, University of Geneva (2021).Google Scholar
Gibson Brandon, R.; Glossner, S.; Krueger, P.; Matos, P.; and Steffen, T.. “Do Responsible Investors Invest Responsibly?” Review of Finance, 26 (2022), 1389–1432.CrossRefGoogle Scholar
Gompers, P. A., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.CrossRefGoogle Scholar
Hartzmark, S. M., and Shue, K.. “Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms.” Working Paper, Boston College (2023).Google Scholar
Haščič, I., and Migotto, M.. “Measuring Innovation Using Patent Data.” OECD Environment Working Papers (2015).Google Scholar
Heath, D.; Macciocchi, D.; Michaely, R.; and Ringgenberg, M. C.. “Does Socially Responsible Investing Change Firm Behavior?” Review of Finance, 27 (2023), 2057–2083.CrossRefGoogle Scholar
Heinkel, R.; Kraus, A.; and Zechner, J.. “The Effect of Green Investment on Corporate Behavior.” Journal of Financial and Quantitative Analysis, 36 (2001), 431–449.CrossRefGoogle Scholar
Hong, H., and Kacperczyk, M.. “The Price of Sin: The Effects of Social Norms on Markets.” Journal of Financial Economics, 93 (2009), 15–36.CrossRefGoogle Scholar
Humphrey, J. E., and Li, Y.. “Who Goes Green: Reducing Mutual Fund Emissions and its Consequences.” Journal of Banking and Finance, 126 (2021), 106098.CrossRefGoogle Scholar
Hwang, C.-Y.; Titman, S.; and Wang, Y.. “Investor Tastes, Corporate Behavior and Stock Returns: An Analysis of Corporate Social Responsibility.” Management Science, 68 (2022), 7131–7152.Google Scholar
Jing, C.; Keasey, K.; Lim, I.; and Xu, B.. “Analyst Coverage and Corporate Environmental Policies.” Journal of Financial and Quantitative Analysis, 59 (2024), 1586–1619.CrossRefGoogle Scholar
Kahn, M. E.; Matsusaka, J.; and Shu, C.. “Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions.” NBER Working Paper No. 31791 (2023).Google Scholar
Kim, Y. “Does Corporate Investment Respond to the Time-Varying Cost of Capital? Empirical Evidence.” Journal of Financial and Quantitative Analysis, 57 (2022), 629–668.CrossRefGoogle Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.CrossRefGoogle Scholar
Koijen, R. S. J.; Richmond, R. J.; and Yogo, M.. “Which Investors Matter for Equity Valuations and Expected Returns?” Review of Economic Studies, 91 (2024), 2387–2424.CrossRefGoogle Scholar
Koijen, R. S. J., and Yogo, M.. “A Demand System Approach to Asset Pricing.” Journal of Political Economy, 127 (2019), 1475–1515.CrossRefGoogle Scholar
Kostakis, A.; Panigirtzoglou, N.; and Skiadopoulos, G.. “Market Timing with Option-Implied Distributions: A Forward-Looking Approach.” Management Science, 57 (2011), 1231–1249.CrossRefGoogle Scholar
Martin, I. W., and Wagner, C.. “What Is the Expected Return on a Stock?” Journal of Finance, 74 (2019), 1887–1929.CrossRefGoogle Scholar
Naaraayanan, S. L.; Sachdeva, K.; and Sharma, V.. “The Real Effects of Environmental Activist Investing.” Working Paper, European Corporate Governance Institute (2021).Google Scholar
Noh, D.; Oh, S.; and Song, J.. “Unpacking the Demand for Sustainable Equity Investing.” Working Paper, Hong Kong University of Science and Technology (2023).Google Scholar
Pástor, Ľ.; Stambaugh, R. F.; and Taylor, L. A.. “Sustainable Investing in Equilibrium.” Journal of Financial Economics, 142 (2021), 550–571.CrossRefGoogle Scholar
Pástor, Ľ.; Stambaugh, R. F.; and Taylor, L. A.. “Dissecting Green Returns.” Journal of Financial Economics, 146 (2022), 403–424.CrossRefGoogle Scholar
Pástor, Ľ.; Stambaugh, R. F.; and Taylor, L. A.. “Green Tilts.” NBER Working Paper No. 31320 (2023).Google Scholar
Pástor, Ľ.; Stambaugh, R. F.; and Taylor, L. A.. “Sustainable Investing.” NBER Working Paper No. 33252 (2024).Google Scholar
Pedersen, L. H. “Carbon Pricing Versus Green Finance.” Journal of Finance, forthcoming (2025).Google Scholar
Pedersen, L. H.; Fitzgibbons, S.; and Pomorski, L.. “Responsible Investing: The ESG-Efficient Frontier.” Journal of Financial Economics, 142 (2020), 572–597.CrossRefGoogle Scholar
Sautner, Z.; van Lent, L.; Vilkov, G.; and Zhang, R.. “Firm-Level Climate Change Exposure.” Journal of Finance, 78 (2023a), 1449–1498.Google Scholar
Sautner, Z.; van Lent, L.; Vilkov, G.; and Zhang, R.. “Pricing Climate Change Exposure.” Management Science, 69 (2023b), 7540–7561.CrossRefGoogle Scholar
van der Beck, P. “Flow-Driven ESG Returns.” Working Paper, Harvard Business School (2023).Google Scholar
Zerbib, O. D. “A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion.” Review of Finance, 26 (2022), 1345–1388.CrossRefGoogle Scholar
Supplementary material: File

Skiadopoulos and Xue supplementary material

Skiadopoulos and Xue supplementary material
Download Skiadopoulos and Xue supplementary material(File)
File 332.5 KB