Does Sustainable Investing Deprive Unsustainable Firms of Fresh Capital?

Abstract

This article examines the sustainability characteristics of listed firms that raise fresh capital by issuing stocks or bonds. Issuance—that is, the primary market—should be of paramount importance to sustainable investors because this is where the demand for and supply of capital meet, contrary to the secondary market where ownership of existing stocks and bonds is merely exchanged between investors. The authors find no evidence that fresh capital is flowing more toward sustainable than to unsustainable firms. The sustainability profile of equity issuers is generally similar to the broad market, while debt issuers even tend to have a below-average sustainability profile. Thus, unsustainable firms appear to have no problems in obtaining funding in public markets. The results suggest that sustainable investing has not been able to deprive unsustainable firms of fresh capital. They do not disprove, however, that sustainable investing may have prevented such firms from raising even more capital, nor that further mainstreaming of sustainable investing may lead to a more noticeable impact on capital flows.

TOPICS: ESG investing, security analysis and valuation, fixed income and structured finance, exchanges/markets/clearinghouses

Key Findings

• ▪ Examining stock and bond issuance of listed firms, the authors find no evidence that fresh capital is flowing more to sustainable than to unsustainable firms.

• ▪ The sustainability profile of equity issuers is generally similar to the broad market, while debt issuers even tend to have a below-average sustainability profile.

• ▪ To date, unsustainable firms have not been deprived of fresh capital, although further mainstreaming of sustainable investing might change that in the future.