CHAPTER 08 ESG and Climate Change in the Shadow of COVID-19: “E,” “S” & G Are Here to Stay
Spotlight: Global Carbon Premium Confirmed
In March 2020, the results of the first empirical study aimed at considering whether and how investors are incorporating climate change risk into their investment decisions were released. 185 The study explored how a so-called “carbon premium” varies around the world, by estimating the stock return premium associated with carbon emissions in a cross-section of over 14,400 organizations in 77 countries. A carbon premium exists when higher stock returns are associated with higher greenhouse gas (GHG) emissions – the idea being that a higher return is demanded by investors to offset the risk associated with elevated GHG emissions. The study revealed that a positive and significant carbon premium exists in North America, Europe and Asia, 186 and that the premium has generally been rising in recent years. The study also indicates that although the carbon premium is related to the level, and changes in levels, of a company’s emissions (both direct and indirect), it has no relation to a company’s emission intensity – the ratio of a company’s total emissions to sales. 187 The study also confirmed that institutional investors are following through on measures they have been threatening to implement for a number of years now as part of their transition to investing in more environmentally sound and sustainable organizations – namely, widespread divestment based on carbon emissions, particularly with respect to their foreign investees.
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