Recent asset-pricing models imply that a brown-minus-green (BMG) portfolio should earn a positive expected return as compensation for climate and transition risk, yet realized BMG returns are mixed. We propose that the key missing state variable is investors' belief dispersion about economic damages from climate change. Empirically, we proxy belief dispersion in financial markets using analysts’ earnings forecasts for matched brown and green firms. Belief dispersion is low pre-Paris agreement, but becomes more volatile thereafter and more importantly predicts BMG returns. Motivated by these facts, we develop a model in which investors motivations are purely pecuniary. They internalize climate damages, but disagree about their magnitude. Climate change reduces future output and investors' heterogeneous beliefs generate speculative trading and a perceived misallocation externality. The equilibrium consists of two-factor representation (financial and climate risk) augmented by belief-driven pricing terms. Introducing an endogenous emissions cap determined by political process links disagreement to transition risk. We show that the sign and magnitude of the BMG expected return depend on belief dispersion and political pressure: BMG premia can be positive, zero, or negative, and sufficiently convex damages restore a uniformly positive BMG return premium.
About the speaker
Yrjö Koskinen the BMO Professor of Sustainable and Transition Finance at the Haskayne School of Business and Director of Research with the Insitute for Sustainable Finance at Smith School of Business, Queen's University. He served as the Associate Dean of Research and Business Impact from 2017 to 2022 at Haskayne. He has previously been a faculty member at Stockholm School of Economics, Boston University’s Questrom School of Business, and the Wharton School of the University of Pennsylvania. He holds an MSc degree in Economics from the University of Helsinki, and a PhD in Management (Finance) from INSEAD. Prior to his academic career, Yrjö worked as a financial journalist, asset manager and as an economist at the Bank of Finland.
Yrjö currently serves as the chair of the steering committee for the Canadian Sustainable Finance Network. He is also a fellow at the Nordic Initiative in Corporate Economics and a research member at the European Corporate Governance Institute. He is the past co-president of the Northern Finance Association.
Yrjö’s main research areas are sustainable and climate finance, and corporate finance and governance. His research has been published in the leading finance and management journals, such as the Journal of Financial Economics, Review of Financial Studies, Management Science, Journal of Financial and Quantitative Analysis, and Review of Finance. He is the recipient of the Standard Life Investments Finance Prize for his research on corporate social responsibility and firm risk.
