Environmentally Integrated Finance: Quantifying the Impact of Externalities Internalization on Sustainable Investment Decisions

Abstract

This study quantifies the critical impact of internalizing environmental costs on corporate sustainable investment decisions. Integrating planetary boundary science into financial theory, we develop a dynamic framework modeling environmental externalities as balance sheet liabilities transmitted through capital cost, asset impairment, and supply chain channels. Analyzing a global panel of 780 firms in carbon-intensive sectors (2017-2023), we identify a decisive inflection point: when internal shadow carbon pricing exceeds €65 per ton, corporate green capital expenditure accelerates nonlinearly by over 300%. This threshold effect, robust across methodologies and holding after controlling for firm characteristics, resolves the "green premium paradox" and demonstrates that rigorously priced environmental accountability transforms ecological imperatives into competitive financial advantages. The findings reveal significant heterogeneity, with energy firms and European entities showing greater responsiveness. The research provides actionable insights for enhancing climate stress-testing, reforming sustainability reporting with science-based metrics, and designing precision-targeted transition finance policies, particularly relevant for emerging economies pursuing decarbonization pathways like China's dual-carbon strategy.