The Financial Cost of Carbon

Climate finance is first and foremost a risk-management problem, which means three things for investors. First, prudent investors will seek to hedge climate change risk by reducing their exposure this risk. Second, demand compensation holding Third, engage with companies urge them reduce if they are not adequately compensated it. For companies, the main implication of climate-risk management that greater carbon emissions have pay higher financial cost (FCC). In new study described in article, authors undertake comprehensive analysis implications exposing transition They explore how corporate GHG affected price-to-earnings (P/E) ratios listed Europe U.S. over period 2016 2020. Their finding markets beginning broadly discount whose high viewed as subjecting levels political regulatory risk, providing what amounts capital. Although price-earnings generally lower emissions, varies significantly sector across firm size, larger experiencing discounts. similar Europe, find discounts industries directly covered pricing through EU ETS. even small price on debt smaller issuers. Overall, emerges clear pattern investors' growing concern translates into an increasingly material FCC emissions. This valuation should encourage progress further along decarbonization path, our results suggest large well other social benefits.