%2multibyte Version: 5.50.0.2890 CodePage: 1252
%\logo{\includegraphics[height=0.20in]{gsb_big_grey.pdf}}
%\usefonttheme{serif}
%\usetheme{Montpellier}
%\graphicspath{{C:/swp55/graphs/IO/}}
%\usepackage{pgfpages}
%\pgfpagesuselayout{4 on 1}[letterpaper,landscape,border shrink=4mm]
%\graphicspath{{/Users/opp/Dropbox/Papers/CRAs/Shared/Regulator_Problem/Graphs/}{C:/Users/mopp/Dropbox/CRA/Regulator_Problem/Graphs/}{Z:/Marcus/Dropbox/CRA/Regulator_Problem/Graphs/}{Z:/Marcus/Dropbox/CRA/Regulator_Problem/Talks/Graphs/}}
%\mode<presentation> { \setbeamercovered{transparent} }
%\setbeamertemplate{navigation symbols}{}
%\makeatletter
%\def \beamerorig@set@color{  \pdfliteral{\current@color}  \aftergroup \reset@color
%}
%\def \beamerorig@reset@color{\pdfliteral{\current@color}}
%\makeatother

\documentclass[red]{beamer}%
\usepackage{amsfonts}
\usepackage{amssymb}
\usepackage{amsmath}
\usepackage{mathrsfs}
\usepackage{mathpazo}
\usepackage{hyperref}
\usepackage{multimedia}
\usepackage{graphicx}
\usepackage{bbm}
\usepackage{color}%
\setcounter{MaxMatrixCols}{30}
%TCIDATA{OutputFilter=latex2.dll}
%TCIDATA{Version=5.50.0.2890}
%TCIDATA{Codepage=1252}
%TCIDATA{CSTFile=beamer.cst}
%TCIDATA{Created=Thursday, September 06, 2007 15:31:26}
%TCIDATA{LastRevised=Tuesday, June 02, 2020 15:22:58}
%TCIDATA{<META NAME="GraphicsSave" CONTENT="0">}
%TCIDATA{<META NAME="PrintViewPercent" CONTENT="100">}
%TCIDATA{<META NAME="SaveForMode" CONTENT="1">}
%TCIDATA{BibliographyScheme=Manual}
%TCIDATA{<META NAME="DocumentShell" CONTENT="Other Documents\SW\Slides - Beamer">}
%TCIDATA{Language=American English}
%BeginMSIPreambleData
\providecommand{\U}[1]{\protect \rule{.1in}{.1in}}
%EndMSIPreambleData
\setbeamertemplate{navigation symbols}{}
\definecolor{light-gray}{gray}{0.8}
\addtolength \belowdisplayshortskip{-6ex}
\addtolength \belowdisplayskip{-4ex}
\setcounter{MaxMatrixCols}{30}
\newenvironment{stepenumerate}{\begin{enumerate}[<+->]}{\end{enumerate}}
\newenvironment{stepitemize}{\begin{itemize}[<+->]}{\end{itemize} }
\newenvironment{stepenumeratewithalert}{\begin{enumerate}[<+-| alert@+>]}{\end{enumerate}}
\newenvironment{stepitemizewithalert}{\begin{itemize}[<+-| alert@+>]}{\end{itemize} }
\usetheme[secheader]{Boadilla}
\newtheorem{assumption}{Assumption}
\newtheorem{proposition}{Proposition}
\newtheorem{condition}{Condition}
\newtheorem{principalI}{Principal's Problem I: Compensation Design}
\newtheorem{principalII}{Principal's Problem II: Equilibrium Action}
\newtheorem{regulator}{Regulator's Problem: Deferral Time}
\DeclareMathOperator \sign{sgn}
\DeclareMathOperator*{\argmax}{\arg \,max}
\graphicspath{{C:/Users/Hoffmann/Dropbox/Arbeit/work_ in_progress/FS/}}
\begin{document}

\date{}%

%TCIMACRO{\TeXButton{ifanonymous}{\date{2020}
%\institute[LSE, SSE]{London, Stockholm}
%\title
%[Socially responsible investment]{A theory of socially responsible investment}
%\author[$O_2$]{Martin Oehmke and Marcus Opp}
%\maketitle}}%
%BeginExpansion
\date{2020}
\institute[LSE, SSE]{London, Stockholm}
\title
[Socially responsible investment]{A theory of socially responsible investment}
\author[$O_2$]{Martin Oehmke and Marcus Opp}
\maketitle
%EndExpansion


\section{Introduction}

\subsection{Motivation}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Motivation}}%
%BeginExpansion
\frametitle{Motivation}%
%EndExpansion


\begin{itemize}
\item ESG is the most important trend in the asset management industry (AUM
grew by factor of 10 since 2000)\pause


\item Most research focuses on asset pricing implications (e.g., do sin or
green stocks generate higher / lower returns)?\pause


\item However, for ESG investing to have real impact (and not just buzz), it
needs to affect firms' choices of production technologies\pause

\end{itemize}

$\Rightarrow$ Requires corporate financing perspective%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Relevant questions}}%
%BeginExpansion
\frametitle{Relevant questions}%
%EndExpansion


\begin{itemize}
\item Under which conditions can ESG\ investors affect firms' adoption of
production technologies? \pause


\item What is the optimal way of achieving impact? \pause


\item How should ESG capital be allocated across firms? Only clean firms?
\pause


\item Would welfare be higher if 100\% capital was ESG-driven?
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\subsection{Results}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Contribution and results}}%
%BeginExpansion
\frametitle{Contribution and results}%
%EndExpansion


\begin{itemize}
\item Holmstrom-Tirole \#XR or (Coase with financing constraints): \newline
Interaction of financing constraints \& negative production
externalities\pause


\item Results:

\begin{itemize}
\item \textquotedblleft Broad mandate\textquotedblright \ is necessary
condition for impact\pause


\item Socially responsible (SR) investors optimally achieve impact via
enabling scale increase of clean(er) production\pause


\item Financial and socially responsible capital are
complementary\pause \newline purely profit-motivated capital increases social
welfare\pause


\item SR investors should rank investments according to social profitability
index that reflects counterfactual pollution decrease (not level!)\pause


\item Pigouvian taxes not a panacea (see paper)
\end{itemize}
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\subsection{Literature}%

%TCIMACRO{\TeXButton{BeginFrame_labeled}{\begin{frame}[label=Literature]}}%
%BeginExpansion
\begin{frame}[label=Literature]%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Literature}}%
%BeginExpansion
\frametitle{Literature}%
%EndExpansion


\underline{\textbf{Theory:}}

\vspace{0.3cm}

Coase (1960), Heinkel, Kraus, and Zechner (2001); Hart and Zingales (2017);
Chowdhry, Davies, and Waters (2018); Davies and van Wesep (2018); Morgan and
Tumlinson (2018), Roth (2019), Landier and Lovo (2020)

\vspace{.5cm}

\underline{\textbf{Empirical:}}

\vspace{0.3cm}

Hong and Kacperczyk (2009); Chava (2014); Barber, Morse, and Yasuda (2018),
Baker et al. (2018), Zerbib (2019)

\vspace{.5cm}

\underline{\textbf{Asset pricing:}}

\vspace{0.3cm}

Pastor, Stambaugh, and Taylor (2019), Pedersen, Fitzgibbons, and Pomorski (2019)%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\section{Model}

\subsection{Model setup}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Production and agency primitives}}%
%BeginExpansion
\frametitle{Production and agency primitives}%
%EndExpansion


\begin{itemize}
\item An entrepreneur with initial resources of $A$ chooses between clean and
dirty technology $\tau \in \left \{  C,D\right \}  $ and sets scale $K$\pause


\item Trade-off between financial and social returns\pause


\begin{itemize}
\item Financial returns: Each technology is CRS yielding payoff $RK$ with
probability $p$, but clean tech has higher per-unit cost $k_{C}>k_{D}$\pause


\item Externalities: $C$ has lower per-unit social cost of $0<\phi_{C}%
<\phi_{D}$\pause


\item Assumption: Clean tech is socially preferable, $\Delta \phi>\Delta k$ and
creates social value $pR-k_{C}-\phi_{C}>0$ ($\Rightarrow$ first-best scale is
\textquotedblleft large\textquotedblright)\pause

\end{itemize}

\item Agency problem: If entrepreneur shirks, probability of success is
reduced to $p-\Delta p$, yielding private benefit of $BK$\pause


\item Entrepreneur may (partially) internalize social costs $\gamma^{E}%
\in \lbrack0,1)$%
\[
U^{E}=\text{Expected net financial payoff }+\text{ private benefit}-\gamma
^{E}\text{ social cost}%
\]

\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Investors}}%
%BeginExpansion
\frametitle{Investors}%
%EndExpansion


There are \textbf{two types of risk-neutral (outside) investors:}

\vspace{0.5cm}

\underline{\textbf{Financial investors (F):}}

\begin{itemize}
\item care only about financial returns

\item financial capital is abundant and competitive\pause

\end{itemize}

\vspace{0.5cm}

\underline{\textbf{Socially responsible investors (SR):}}

\begin{itemize}
\item Condition 1 (\textbf{Broad mandate}): concern for social cost
unconditional (independent of own investment)\pause


\item Condition 2 (\textbf{Size}): Either one large fund or
coordinated\pause


\item internalization of social cost given by $\gamma^{SR}$ where
($\gamma^{SR}+\gamma^{E}\leq1$)
\end{itemize}

%

\[
U^{i}=\text{Expected net financial payoff }-\gamma^{i}\text{ social cost,
}i\in \{F,SR\}
\]
%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\section{Analysis}

\subsection{Benchmark equilibrium}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Benchmark equilibrium: only financial investors}}%
%BeginExpansion
\frametitle{Benchmark equilibrium: only financial investors}%
%EndExpansion


\begin{itemize}
\item financial investors contribute $I_{\tau}^{F}$ against promised repayment
of $X^{F}$

\item entrepreneur chooses technology $\tau \in \{C,D\}$ and scale $K_{\tau}%
^{F}$

\begin{itemize}
\item resource constraint:
\[
K_{\tau}^{F}k_{\tau}=A+I_{\tau}^{F}%
\]
\pause


\item entrepreneur's \textbf{IC constraint}:%
\[
p(RK_{\tau}^{F}-X^{F})\geq(p-\Delta p)(RK_{\tau}^{F}-X^{F})+BK_{\tau}^{F}%
\]
\pause


\item financial investors' \textbf{IR constraint}:
\end{itemize}
\end{itemize}

%

\[
pX^{F}-I_{\tau}^{F}\geq0
\]
%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Benchmark: only financial investors}}%
%BeginExpansion
\frametitle{Benchmark: only financial investors}%
%EndExpansion


\begin{itemize}
\item Binding IC and IR imply optimum firm scale under technology $\tau$:
\[
K_{\tau}^{F}=\frac{A}{\textcolor{red}{\xi}-\textcolor{blue}{\pi_{\tau}}}%
\]


\begin{itemize}
\item \textcolor{red}{$\xi:=p\frac{B}{\Delta p}$}: agency rent per unit of investment

\item \textcolor{blue}{$\pi_{\tau}:=pR-k_{\tau}$}: per-unit financial return
of technology $\tau \in \{C,D\}$\pause

\end{itemize}
\end{itemize}

\vspace{0.5cm}

\begin{itemize}
\item Because dirty technology has higher financial payoff ($\pi_{D}>\pi_{C}$)%
\[
K_{D}^{F}>K_{C}^{F}%
\]
\pause


\item Larger financing capacity implies that entrepreneur adopts dirty iff
\[
(\xi-\gamma^{E}\phi_{D})K_{D}^{F}>(\xi-\gamma^{E}\phi_{C})K_{C}^{F}%
\]

\end{itemize}%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\subsection{Equilibrium with SR investors}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Equilibrium with SR\ investors}}%
%BeginExpansion
\frametitle{Equilibrium with SR\ investors}%
%EndExpansion


Suppose entrepreneur chooses $D$, then SR (reservation) utility is given by%
\[
\bar{U}^{SR}=-\gamma^{SR}\phi_{D}K_{D}^{F}<0
\]
SR investors can induce entrepreneur to switch technology via providing
entrepreneur with upfront consumption $c$ and/or increased scale\pause


\begin{problem}
[Socially responsible investors]%
\[
\max_{I^{F},I^{SR},X^{SR},X^{F},K,c,\tau}pX^{SR}-I^{SR}-\gamma^{SR}\phi_{\tau
}K\text{ }%
\]
subject to IR\ of the entrepreneur:%
\begin{equation}
U^{E}\left(  K,X^{SR}+X^{F},\tau,c,1\right)  \geq \bar{U}^{E}\nonumber
\end{equation}
as well as IC, financial investors' IR, and resource constraint.
\end{problem}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion


\begin{theorem}
[Optimal financing agreement]Let
\textcolor{blue}{$\hat{v}_{\tau}:=\pi_{\tau}-\left(
\gamma^{E}+\gamma^{SR}\right)  \phi_{\tau}$} denote joint surplus per unit of
scale, accruing to all investors \& entrepreneur. Then, $\hat{c}=0$ and%
\[
\hat{\tau}=\argmax_{\tau}\textcolor{blue}{\hat{v}_{\tau}}\hat{K}\left(
\tau \right)
\]

\end{theorem}

\begin{itemize}
\item Technology choice governed by total value added: per-unit surplus
$\hat{v}_{\tau}$ and scale $\hat{K}\left(  \tau \right)  =\frac{\xi-\gamma
^{E}\phi_{D}}{\xi-\gamma^{E}\phi_{\tau}}K_{D}^{F}$: \pause If $\gamma
^{SR}+\gamma^{E}\uparrow$ $\Rightarrow$ Clean production\pause


\begin{itemize}
\item Financing constraints $\Rightarrow$ optimal to induce switch\ via scale
increase of clean production ($\hat{K}\left(  C\right)  >K_{C}^{F}$) rather
than consumption $\hat{c}=0$\pause


\item As competitive financial investors would not fund this scale increase
$\Rightarrow$ \pause \newline financial loss for SR investors, but outweighed
by reduced externality\pause

\end{itemize}

\item Implementation:

\begin{itemize}
\item Bond /\ Green bond issue: Fairly priced regular bond + green bond issued
at premium in primary market (with technology choice covenant)

\item Dual-class equity issuance: (with and without voting rights)
\end{itemize}
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Complementarity between financial and social
%capital}}%
%BeginExpansion
\frametitle{Complementarity between financial and social capital}%
%EndExpansion


Presence of \textbf{both types of capital} is strictly \textbf{better}

\begin{itemize}
\item \textbf{even relative to} a world with \textbf{only SR investors}
\end{itemize}

\pause

%\vspace{0.5cm}


\vspace{0.3cm}

\textbf{\underline{Financial investors:}}

\begin{itemize}
\item \textbf{alleviate underinvestment} given clean technology: $K_{C}%
^{F}>K_{C}^{SR}$ \pause

\item but may induce entrepreneur to \textbf{adopt dirty technology}
\end{itemize}

\pause

\vspace{0.5cm}

\textbf{\underline{Socially responsible investors:}}

\begin{itemize}
\item SR investors can ensure \textbf{clean technology is chosen}

\item but \textbf{by themselves less efficient} financiers

\item \textbf{counterfactual pollution necessary} to unlock SR capital
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Necessary conditions for impact}}%
%BeginExpansion
\frametitle{Necessary conditions for impact}%
%EndExpansion


\begin{itemize}
\item \textbf{Broad mandate:} If socially responsible only care about social
costs generated by own investment (narrow mandate):

\begin{itemize}
\item Dirty firms would be financed by financial investors, ...

\item Social costs by these firms do not relax participation constraint of SR
investors $\Rightarrow$ no additional financing capacity (no impact)\pause

\end{itemize}

\item \textbf{Coordination/ size:}\ If socially responsible investors are
infinitesimal and uncoordinated, they behave like financial investors
$\gamma^{SR}=0$ \pause


\item \textbf{Sufficient capital:} SR investors have enough capital to induce
technology change
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\subsection{Multi-firm economy}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Multi-firm economy}}%
%BeginExpansion
\frametitle{Multi-firm economy}%
%EndExpansion


\begin{itemize}
\item Suppose there are \textbf{many heterogeneous firms}:

\begin{itemize}
\item denote firm types by $j$

\item firm type characteristics: $A_{j}$, $R_{j}$, $\phi_{\tau,j}$,
$k_{\tau,j}$, etc.

\item each individual firm infinitesimally small
\end{itemize}
\end{itemize}

\begin{itemize}
\item \textbf{SR investors} have \textbf{limited capital }$\kappa$ in
aggregate: \newline How should scarce socially responsible capital be
allocated?\newline In absence of SR investment, SR\ payoff is:%
\[
\underset{\text{Reformable}}{\underbrace{\int_{\gamma_{j}^{E}<\bar{\gamma}%
_{j}^{E}}\phi_{D,j}K_{D,j}^{F}d\mu(j)}}+\underset{\text{already clean}%
}{\underbrace{\int_{\gamma_{j}^{E}\geq \bar{\gamma}_{j}^{E}}\phi_{C,j}%
K_{C,j}^{F}d\mu(j).}}%
\]

\end{itemize}%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Multi-firm economy investment criterion}}%
%BeginExpansion
\frametitle{Multi-firm economy investment criterion}%
%EndExpansion


\begin{itemize}
\item For reformable firm type $j$, reform payoff to SR investors is:
\[
\Delta U_{j}^{SR}=\underset{\text{Financial loss}}{\underbrace{\left(
\pi_{C,j}-\xi_{j}\right)  \hat{K}_{j}+A_{j}}}\underset{\text{Change in
externality}}{+\underbrace{\gamma^{SR}\left[  \phi_{D,j}K_{D,j}^{F}-\phi
_{C,j}\hat{K}_{j}\right]  }}.
\]
\pause

\item With scarce capital, decision metric is social profitability index:%
\[
\text{SPI}_{j}=\mathbbm{1}_{\gamma_{j}^{E}<\bar{\gamma}_{j}^{E}}\frac{\Delta
U_{j}^{SR}}{I_{j}^{SR}}=\frac{\Delta \phi_{j}-\Delta \pi_{j}}{\Delta \pi
_{j}+\lambda_{j}\left(  p_{j}R_{j}-\xi_{j}\right)  }%
\]


\begin{itemize}
\item Invest in firms with SPI$_{j}>$SPI$^{\ast}\left(  \kappa \right)  $

\item Never invest in firms / entrepreneurs that are already clean

\item Not level of pollution matters $\phi_{C}$, but avoided pollution
$\Delta \phi$ matters\newline
\end{itemize}
\end{itemize}

\bigskip%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Balance of capital}}%
%BeginExpansion
\frametitle{Balance of capital}%
%EndExpansion


\begin{itemize}
\item When \textbf{SR capital is abundant}, F and SR capital are
\textbf{complements}.\pause

\end{itemize}

\vspace{0.7cm}

\begin{itemize}
\item When \textbf{SR capital is scarce}, there is a \underline
{\textbf{trade-off}}:\pause


\begin{itemize}
\item Financial investors alleviate underinvestment problem for clean
firms\pause


\item cause overinvestment in dirty technology for non-reformed firms\pause

\end{itemize}
\end{itemize}

\vspace{0.7cm}

$\Rightarrow$ \textbf{Welfare} is \textbf{highest} when \underline
{\textbf{capital is balanced}}

\begin{itemize}
\item financial capital needed to alleviate underinvestment

\item sufficient SR capital needed to \textquotedblleft
discipline\textquotedblright \ financial capital when it leads to inefficient
production choices
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Regulation}}%
%BeginExpansion
\frametitle{Regulation}%
%EndExpansion


\begin{itemize}
\item So far we treated regulation as exogenous (suboptimal) \pause


\item What is the effect of textbook policies? \pause With enough SR\ capital,
text-book policies may backfire\pause

\begin{itemize}
\item Pigouvian pollution tax, say tax of $\phi_{\tau}$ per unit of production

\item Production limit / ban of dirty production\pause \newline \newline
eliminate \textquotedblleft threat\textquotedblright \ of dirty production
$\Rightarrow$ no $\Delta$ financing capacity\pause \newline \newline Bigger
point: Policies are one-sided as they only \textquotedblleft
target\textquotedblright \ inefficient technology choice, but ignore to address
financing constraints!
\end{itemize}
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion
%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Future work}}%
%BeginExpansion
\frametitle{Future work}%
%EndExpansion


\begin{itemize}
\item Dynamic setting:

\begin{itemize}
\item How to account for dirty legacy assets

\item How to ensure the timely adoption of novel (and cleaner)
technologies\newline Adoption hard to contract on ex ante (implications for
control rights)
\end{itemize}

\item Spill-over effects across firms in GE setting

\item Heterogeneous SR investors with conflicting goals

\item Interaction of regulatory policies and ESG\ investing
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\section{Conclusion}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Conclusion}}%
%BeginExpansion
\frametitle{Conclusion}%
%EndExpansion


Model of financing constraints and production externalities

\begin{itemize}
\item Impact requires broad mandate (financial loss)\newline$\Rightarrow$ SR
funds should be evaluated according to broader metrics

\item Impact investing occurs optimally via \textbf{increase in clean scale}

\item Financial and SR capital are \textbf{complementary (}$\Rightarrow$
balance needed)

\item Optimal capital allocation according to social profitability index
(SPI)\newline avoided pollution, not level of pollution matters!
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\section{Appendix}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Implementation of optimal agreement}}%
%BeginExpansion
\frametitle{Implementation of optimal agreement}%
%EndExpansion


\begin{itemize}
\item Any optimal agreement produces same \textquotedblleft real
choices\textquotedblright, $\hat{\tau}$ and $\hat{K}$ and same total payout to
investors $\hat{X}=X^{SR}+X^{F}$ given by IC:%
\[
\hat{X}=\left(  R-\frac{B}{\Delta p}\right)  \hat{K}%
\]
\pause


\item All possible financing arrangements can be traced out by varying cash
flow share accruing to SR investors $\lambda \in \left[  0,1\right]  $%
\begin{align*}
I^{F}  &  =\left(  1-\lambda \right)  p\hat{X}\\
I^{SR}  &  =k_{C}\hat{K}-A-I^{F}%
\end{align*}
\pause


\item \textbf{Implementation:}

\begin{itemize}
\item Bond /\ Green bond issue: Fairly priced regular bond + green bond issued
at premium in primary market (with technology choice covenant)

\item Dual-class equity issuance: (with and without voting rights)
\end{itemize}
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion


\section{Discussion}%

%TCIMACRO{\TeXButton{BeginFrame}{\begin{frame}}}%
%BeginExpansion
\begin{frame}%
%EndExpansion
%

%TCIMACRO{\QTR{frametitle}{Production technologies}}%
%BeginExpansion
\frametitle{Production technologies}%
%EndExpansion


\begin{itemize}
\item Formal results readily extend to

\begin{itemize}
\item arbitrary number of production technologies

\item technology-specific agency rents

\item even positive production externalities (think of R\&D)\pause

\end{itemize}

\item Decreasing returns to scale with first-best scale\textbf{ }$K_{C}^{FB}$

\begin{itemize}
\item Strong financing constraints ($K_{C}^{F}\leq \bar{K}<K_{C}^{FB}$):
Financial investors provide so little capital for clean technology, that
optimal agreement by SR investors only rewards entrepreneur via scale
increase\pause


\item Medium financing constraints ($K_{C}^{F}\in \left[  \bar{K},K_{C}%
^{FB}\right]  $): SR investors optimally just enable scale increase up to
$K_{C}^{FB}$ (rest in consumption)\pause


\item Weak financing constraints ($K_{C}^{F}>K_{C}^{FB}$): SR\ investors pay
entrepreneur to reduce scale to $K_{C}^{FB}$
\end{itemize}
\end{itemize}

%

%TCIMACRO{\TeXButton{Transition: Box Out}{\transboxout}}%
%BeginExpansion
\transboxout
%EndExpansion%
%TCIMACRO{\TeXButton{EndFrame}{\end{frame}}}%
%BeginExpansion
\end{frame}%
%EndExpansion

\end{document} 