Green Shields: the role of ESG in uncertain times

Working paper

The rapid growth of sustainable investing—now exceeding $35 trillion globally—has transformed financial markets, yet the implications for monetary policy transmis sion remain unexplored. While extensive literature documents heterogeneous firm responses to monetary policy through traditional channels like size and leverage, whether environmental, social, and governance (ESG) characteristics create distinct transmission mechanisms is unknown. Using high-frequency identification around 160 Federal Reserve announcements (2005-2025), we uncover an asymmetric pattern: high-ESG firms gain 1.6 basis points protection from contractionary target surprises yet suffer 2.6 basis points greater sensitivity to forward guidance shocks. This asymmetry persists within industries and intensifies with investor climate awareness. Remarkably, the Paris Agreement inverted these relationships—before December 2015, high-ESG firms were more vulnerable to contractionary policy within industries; afterward, they gained protection, a 186 basis point reversal. We develop a two-period model featuring heterogeneous investors with sustainability preferences that quantitatively matches these patterns. The model reveals how ESG investors’ non-pecuniary utility creates differential demand elasticities, simultaneously protecting green firms from imme diate rate changes while amplifying forward guidance vulnerability through their longer investment horizons. These findings establish environmental characteristics as a new dimension of monetary policy non-neutrality, with profound implications as sustainable finance continues expanding.

Authors: Kansoy, F; Stasiulaitis, D

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2025-06-02
• Paper number: 1082
• Language: English
• Keywords: ESG; monetary policy; sustainable finance; climate change