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VoxTalks Economics
S7 Ep15: Mispriced risk and the end of ESG
Mar 22, 2024
Finance professor Alex Edmans discusses the mispricing of carbon transition risk in markets, highlighting how high emitters may be outperforming. The conversation explores the complexities of balancing social good with shareholder returns in ESG investments and the challenges faced by long-term investors in driving decarbonization efforts.
39:21
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Quick takeaways
- Mispricing of transition risk in emitting stocks leads to potential investment advantages without corresponding risks.
- Investors struggle to align short-term financial gains with long-term negative externalities from climate risks, emphasizing the need for balancing economic returns with societal impact.
Deep dives
The Concept of Carbon Premium in Financial Markets
The carbon premium refers to the phenomenon where stocks emitting more carbon yield higher returns than low-emission stocks. This premium can be interpreted in two ways: as compensation for higher risk due to potential carbon taxes, or as a result of outperformance where emitting stocks have higher profitability. Insufficient pricing of carbon transition risk could lead to significant impacts, suggesting that emitting stocks might not be riskier but rather offer higher returns.
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