The environmental and macroeconomic effects of socially responsible investment

We analyze the effects of socially responsible investment and public abatement on environmental quality and the economy in a continuous-time dynamic growth model featuring optimizing households and firms. Environmental quality is modeled as a renewable resource. Consumers can invest in government bonds or firm equity. Since investors feel partly responsible for environmental pollution when holding firm equity, they require a premium on the return to equity. We show that socially responsible investment behavior by households partially offsets the positive effects on environmental quality of public abatement policies. (C) 2011 Elsevier B.V. All rights reserved.