Financial Institutions and the Green Transition: ESG capital allocation and outcomes

Abstract

Climate change is one of, if not the most important, challenges of our time and the green transition needs an estimated $9 trillion of finance every year - only a fifth of which is currently being met. Investors and lenders increasingly view environmental impact through a risk lens and may additionally hold ethical preferences for environmental and social outcomes. Whether this rising interest in sustainable finance translates into real progress is, however, far from settled. In her dissertation, Kayshani Gibbon studies the mechanisms through which financial institutions can support the green transition, from investor preferences and asset manager portfolio decisions, through bank ownership and lending, to the environmental outcomes of borrowing firms. In the first paper, she questions how investors respond when mutual funds rename themselves to include a sustainability term, and whether fund managers follow through. Investor flows are smaller than earlier work suggested, but portfolios do move: managers reduce their exposure to controversial sectors and cut portfolio carbon intensity. This is consistent with a signalling story rather than pure greenwashing. In the second paper, Kayshani turns to the supply side and ask whether banks' shareholders enable or constrain lending for the green transition. She finds a pull-back-and-tilt pattern for active investors: banks with greater active-investor ownership lend less overall, pull back from carbon-intensive borrowers, and tilt what remains toward green loans, whose use-of-proceeds are verified at origination. Shareholders are usually assumed to push banks to lend more, active investors instead pull them back from the most polluting borrowers. In the third paper, she studies whether sustainability-linked and green loans drive borrower decarbonisation and green innovation. Sustainability-linked loans appear to certify decarbonisation commitments borrowers already had, whereas green loans, tied to specific projects, are followed by meaningful increases in green patenting. The overarching conclusion is that the policy question is not whether financial institutions can support the green transition, but which institutions and which instruments are best placed to deliver which outcome — portfolio and credit reallocation, emissions reductions, or genuine innovation. Real outcomes depend on the ownership structures that discipline decisions and the contractual design that binds them.