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HomePaperIntermediary Capital and Financing Sustainable Investment

Intermediary Capital and Financing Sustainable Investment

29 February 2024
Authors: Tak-Yuen Wong (National Tsing Hua University) and Jin Yu (Monash University)
Presenter: Jin Yu (Monash University)
Abstract:

We develop an equilibrium financing model that addresses agency frictions in sustainable investment, featuring socially responsible investors as intermediaries. Actively engaging with firms, these investors provide a funding advantage to green enterprises. Our findings reveal that sustainability-linked debt emerges as an optimal security design, incentivizing both entrepreneurs and social investors. The equilibrium return on social capital, determined by incentive costs and financial constraints associated with green investments, rises with investor social preferences through firms competing for the funding advantage. Consequently, when investors prioritize societal well-being, heightened competition may lead to the crowding out of green investments. We discuss the real-world implications of our model and emphasize the need for welfare-improving regulatory measures to alleviate market competition.

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