Sustainable investing in financial markets can reduce carbon emissions if it lowers the cost of capital of green investments. We show that the cost of capital perceived by greener firms was close to that of browner firms until 2016 and then fell disproportionately after the post 2016 surge in sustainable investing. The average post-2016 difference between brown and green firms is roughly 1 percentage point. Within firms, we find that some of the largest energy and utility firms have started to apply a lower perceived cost of capital to their greener divisions since sustainable investment surged. Firms facing a higher relative cost of green capital in their sector pledge to reduce emissions by more. Our measures of the perceived cost of capital are hand-collected and associated with firm-level realized returns to capital and long-run investment. Taken together, the findings support the view that sustainable investing is associated with a reallocation of capital toward greener investments through a cost of capital channel, both across firms and within firms.