Carbon Pricing versus Green Finance. In Search of the True Greenium.Seminar
Participate
Department: Finance
Speaker: Lasse Pedersen (CBS)
Room: T117
In Search of the True Greenium
Abstract
The greenium (the expected return of green securities relative to brown) is a central impact measure for ESG investors. Replicating the literature’s wide range of equity greenium estimates based on realized returns, we find that these are not robust to changing the greenness measure or time period. Instead, we propose a robust green score combined with forward-looking expected returns, yielding a more precisely estimated annual equity greenium of -25 basis points per standard deviation increase in greenness. The greenium is more negative in greener countries and over time. Finally, we provide greeniums for corporate bonds, weighted-average costs of capital, and sovereign bonds.
Keywords: Greenium, cost of capital, ESG, replication, climate, sustainable finance
Carbon Pricing versus Green Finance
Abstract
Economics recommends combating climate change with carbon pricing, but green finance - such as ESG investing and sustainable finance regulations - is becoming widespread. In a unified model, I show how to "translate" a carbon tax into green finance terms and present the following results. First, if carbon prices equal their social cost, green finance should not be used. Second, with too low carbon prices, green finance can implement the social optimum if and only if the cost of capital can be controlled and there are no stranded assets - but the calibrated cost-of-capital adjustments appear unattainable and stranded assets do exist. Third, I show how green finance depends on direct and indirect emissions.
Keywords: ESG investing, sustainable finance regulation, carbon allowances, carbon offsets, carbon credits JEL Codes: G1, H23, E44, O44, Q5