This article explores how financial market performance impacts climate change through pollution. It presents a theoretical framework analyzing the gap between private and social optima in asset allocation. Private investors focus on financial returns, neglecting environmental externalities, while social planners account for these costs to achieve sustainable outcomes. The analysis predicts a critical threshold for portfolio returns, beyond which higher returns reduce pollution due to the rising environmental costs of dirty assets. Empirical analysis examines whether investors or regulators have integrated social responsibility into their decisions, specifically if there's a critical point where increased returns lead to decreased emissions.

Using panel data from 43 countries (1990-2021), results show a nonlinear relationship between financial returns and pollution. Below a 23.8\% return threshold, higher returns increase pollution; beyond this threshold, higher returns reduce pollution, indicating partial internalization of climate risks. High-income countries transition at lower returns (20.5\%), while middle-income economies face higher barriers. G20 nations show a higher threshold (32.5\%), whereas OECD policies have no significant effect.