Investing for tomorrow: long-term investment, economic scale and the green transition

We seek to explain positive correlations between green investments and long-term financial holdings, the size of the economy and the variance in GDP. To this end, we develop a model for green investments that expands on a standard non-cooperative private provision of public goods game, with heterogeneous agents and intertemporal choices. Agents differ in, first, time preference and, second, wealth/income. Our model shows that: (a) green bonds tend to account for larger shares of the portfolios of long-term oriented investors, (b) larger economies tend to invest more in climate mitigation, and (c) more heterogeneity among types of agents increases climate investments. Our model has significant implications for climate policy: it points to the importance of long-term investors in the green transition and to the importance of larger groups of countries agreeing on cooperative frameworks, for example, in the form of climate clubs, to increase overall investment in climate mitigation.

This Working Paper has been produced with financial support from the European Climate Foundation.

We thank Uuriintuya Batsaikhan, Baptiste Bozet, Estelle Cantillon, Micael Castanheira, Thomas Demuynck, Silvia Merler and Frederick van der Ploeg for their insightful feedback. We also thank participants in the Bruegel Monday seminar, the BRG at ECARES and the Bruegel event ‘From savings to sustainability: long-term investors and Europe’s green transition’ for their comments and suggestions. We also thank Anna Bahí-Esteba for excellent research assistance.