Green Transmission : Monetary Policy in the Age of ESG

In this paper, I investigate how the Net-Zero transition affects the transmission of monetary policy. I first document an upward trend in environmental performance among US publicly listed companies over the last decade. Second, I evaluate the implications of firms becoming `greener' for the transmission of monetary policy on asset prices, credit risk and firm-level investment. In response to a shock to monetary policy, `green' firms (with high environmental scores) are significantly less impacted than their `brown' counterparts (with lower environmental scores). The dependence of monetary policy responses on firm-level greenness is not explained by intrinsic differences in firms' characteristics. Instead, I show that the heterogeneous response is the result of investors' preferences for sustainable investing. Using a stylized theoretical framework, I illustrate how incorporating such preferences attenuates the semi-elasticity of `green' asset prices with respect to monetary policy shocks