University of Chicago Booth School of Business Associate Professors Niels Joachim Gormsen and Kilian Huber, along with their co-author Sangmin S. Oh (Columbia Business School), received Northwestern University’s Moskowitz Prize for their study Climate Capitalists. The study was selected from 97 submissions for its rigorous empirical methods and high potential impact on sustainability-related business and investment practices.
“Since the pandemic we’ve seen more and better research in sustainable finance,” says Lloyd Kurtz, founder of the Moskowitz Prize and again one of the judges. “The quality of the papers in the top group is exceptional. The recognized papers stood out because of their clarity and rigor but, even more importantly, because they tell us something new. Each one has significant implications for the field and deserves attention from both academics and practitioners.”
Gormsen, Huber and their co-author study a critical question: How can we encourage companies to adopt greener practices and reduce emissions?
Carbon taxes remain too low to drive change today, so alternative incentives are required. The researchers examine the cost of green capital as a potential motivator, through a novel approach that analyzes data from firms’ corporate calls with investors—such as mentions of cost of capital—to understand their perceived cost of green capital. They studied 730 US and European firms with emissions large enough to have environmental impact, over the period from 2002 to 2023.
They find that the cost of capital used by greener firms and for greener investments has decreased since 2016, as the public and private sectors have increased attention to climate change, as evidenced by rising assets under management in sustainable funds. As far as numbers, the authors reveal that green firms have a perceived cost of capital that is 1 percentage point lower than that of brown firms.
Overall, the findings suggest that lowering the cost of capital for green investments, for example through directed investments by financial investors and governments, can at least partly facilitate the transition to a green economy, such as by motivating “brown” firms (those currently less likely to emphasize sustainability) to go green. The authors have also launched a “cost of capital” project to understand how firms’ perceived cost of capital and their discount rates are determined, change, and influence corporate investment.
“I was mesmerized by the new cost of capital measure showcased in this study,” says Moskowitz judge Andrew Karolyi. “The finding is what we have needed in the at-times confusing debate of market valuations of environment risk exposures versus carbon emissions, where so much energy has revolved around the cost of capital, but relying on ex post analysis of returns. I predict their findings are going to be well-received by the academy.”
Fellow judge Ravi Jagannathan agrees: “By analyzing disclosures made during earnings calls, the authors collect data on both firm- and project-level hurdle rates, offering a more detailed perspective compared to most studies, which typically focus solely on firm-level estimates. The findings highlight the critical role of cost of capital in directing resources toward green projects across divisions within firms. This demonstrates that activism and government policies promoting sustainability are driving real, measurable changes in corporate behavior.”
Study author Niels Gormsen says: “We are very grateful to the jury and the Moskowitz Prize initiative for their generous support of research in sustainable finance. We hope that research in this area will draw attention to how financial markets influence responses to global challenges, such as climate change.” Co-author Sangmin Oh says, “We’re very grateful for the recognition and excited to see growing interest in how market signals affect real investment.”
Co-author Killian Huber notes that “we’ve spent years collecting data on how firms make investment decisions, in particular firms’ perceptions of the cost of the capital that determines their long-run investments. We are grateful to everyone who contributed to this effort, in particular our team of research assistants and professionals.”
More About the Moskowitz Prize
The Moskowitz Prize is named for Milton Moskowitz (1932-2019), one of the field’s first and most innovative investigators, whose pioneering legacy continues through the Moskowitz Prize.
Moskowitz rose to prominence through his ‘100 Best Companies to Work For’ lists, one of the most influential early incentives for responsible corporate governance, and an early examination of the relationship between responsible practices and financial returns.
In 2020 the Moskowitz Prize became an initiative of Northwestern University’s Kellogg School of Management. First presented in 1996 by the U.S. Social Investment Forum, the Prize was founded by Lloyd Kurtz, currently Senior Portfolio Manager at Montecito Bank and Trust and a Visiting Scholar at Kellogg. The Moskowitz Prize was awarded by UC Berkeley’s Haas School of Business from 2005-2019.
Judging for the Moskowitz Prize is completed by a panel of some of the world’s most accomplished sustainable finance researchers and practitioners. In 2023, the panel comprised seventeen judges from universities and financial firms from all over the world, including the Kellogg School at Northwestern University.
Adapted from Northwestern University