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Sustainable and Impact Investing: Investor Preferences and Firms’ Environmental Decisions.
Dissertation

Sustainable and Impact Investing: Investor Preferences and Firms’ Environmental Decisions.

TINGXUAN ZHAO
Doctor of Philosophy (PhD), Washington State University
2026
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Abstract

This dissertation examines the effectiveness of sustainable investing in influencing asset prices and real corporate ESG outcomes. The first chapter develops a two-period asset pricing model in which investors derive utility from both financial returns and ESG characteristics. While increased demand for green assets initially lowers their expected returns and cost of capital, investors update return expectations in the second period under a Bayesian framework, which attenuates this effect over time. As a result, sustaining a long-term reduction in the cost of capital requires continuous growth in ESG investor demand. Extensions show that greenwashing and ESG rating uncertainty further weaken price impacts, while the presence of brown investors can discourage greenwashing through a separating equilibrium. The second chapter studies impact investing by modeling how investors allocate capital to directly improve firms’ ESG performance under uncertainty about firm responsiveness and ESG ratings. The model characterizes optimal impact investment and firm engagement decisions, showing that ESG improvements depend on the trade-off between financial returns, ESG benefits, and ESG-related risk. Overall, the dissertation highlights the limited but nuanced role of financial markets in achieving sustainable investment objectives.

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