Impact of ESG preferences on investments and emissions in a DSGE framework

This paper delves into the effects of environmental, social, and governance (ESG) factors on investment behavior and emissions using a dynamic stochastic general equilibrium framework. We discover that households with a strong ESG ethos significantly increase their green investing, which influences pricing dynamics between green and nongreen capital. Entrepreneurs with ESG preferences intensify efforts to curb emissions, leading to pollution reduction and higher abatement costs. Our simulations suggest that heightened ESG preferences among entrepreneurs and households could pivot investments toward sustainability, though it might adversely affect overall output. This research highlights the pivotal role of ESG considerations in promoting sustainable economic practices, offering a forward-looking perspective on integrating ESG criteria into economic and policy planning to foster environmental and economic sustainability. •The DSGE model integrates ESG factors to analyze investment and emission impacts.•ESG preferences significantly influence market behaviors and pollution.•The study finds green investments and reduced emissions driven by ESG concepts.•Policies should enhance ESG adoption for environmental and economic benefits.•ESG principles are linked with macroeconomic and environmental outcomes.