IFin Seminar, Walter Pohl, Norwegian School of Economics - "Asset Pricing with Disagreement about Climate Risks"

Institute of Finance

Date: 7 December 2023 / 12:30 - 13:40

Speaker: Walter Pohl, Norwegian School of Economics

Title:        "Asset Pricing with Disagreement about Climate Risks"

Date:       December 7, 2023

Time:       12:30 - 13:40

Room:      Red Room (Executive Center)

USI West Campus

 

Abstract:

This paper analyzes how climate risks are priced on financial markets. We show that climate tipping thresholds, disagreement about climate risks, and preferences that price in long-run risks are crucial to an understanding of the impact of climate change on asset prices. Our model simultaneously explains several findings that have been established in the empirical literature on climate finance: (i) news about climate change can be hedged in financial markets, (ii) the share of green investors has significantly increased over the past decade, (iii) investors require a positive, although small, climate risk premium for holding “brown” assets, and (iv) “green” stocks outperformed “brown” stocks in the period 2011–2021. The model can also explain why investments in mitigating climate change have been small in the past. Finally, the model predicts a strong, non-linear increase in the marginal gain from carbon-reducing investments as well as in the carbon premium if global temperatures continue to rise.

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