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Green firms (with high environmental performance ratings) experience a less pronounced reduction in stock prices compared to brown firms (with low environmental performance ratings) in response to monetary policy tightening. Using a stylised theoretical framework and comprehensive empirical analysis, I show that this is driven by investors’ preferences for sustainable investing. When interest rates rise, expected future dividends are discounted more heavily, reducing both green and brown asset prices. However, investors favouring sustainable investments are less likely to unwind their green portfolio positions in response to contractionary monetary policy shocks, thereby mitigating the impact on green asset prices.
