VIII. Greeniums Flashcards
Define ESG screening
If a company’s carbon is too high I won’t buy you or I will get rid of exposure in the portfolio -> Divestment
Define Activism
Force way onto board and then push the firm to do more renewables.
Shareholders Advocacy
Send letter to CEO threatening to divest.
How do we explain the fall in governance but rise in SRI proposals?
SRI and governance trends are not related
You can’t support all these SRI proposals if you don’t lighten up on some of the governance proposals.
Pecuniary View
Tilt toward green stocks associated with higher profits
Non-Pecuniary View
This view argues that shareholders are willing to take a haircut to address these externalities.
ESG is implicit carbon price.
Are green bonds the pecuniary or non-pecuniary view?
Bondholders don’t control the company - just care about coupon.
If you’re accepting a lower coupon, green bonds therefore cannot be pecuniary. Must be some willingness to profit loss to address externalities.
Define Greenium
Haircut shareholders are willing to take in their rates of return to fund responsible firms and adaptation.
Bigger the greenium, the more society is spending to do disaster mitigation so effectively the higher the social cost of carbon.
It’s an equilibrium price that the market discovers given that there is demand on the part of investors that are by construction not profit maximizing.
Premium you have to pay for companies with green pledge
Why are greeniums significant?
Greenium matters because if the market is willing to pay for green assets, the market will deliver more green assets.
Equilibrium Perspectives of Responsible Stocks
If stocks of responsible firms have higher prices, non-responsible firms will be motivated to pay mitigation or adaptation costs so as to qualify to be held by investors who are restricted to responsible firms.
Simple Formula in Equilibrium
Explain Terms
rs-ru = Difference in required rate of return between sustainable and not-sustainable firms. Dividend yield that investors in responsible firms are sacrificing in order to incentivize firms to be responsible.
m = firm spending on mitigation as a fraction of capital
q = Tobin’s q (price of firm capital)
m/q is foregone dividend yield to fund mitigation (lower consumption)
Simple Formula in Equilibrium
Why is there only one Tobin q?
Value-maximizing firms have to be indifferent between being responsible or not in equilibrium.
These corporations are ex-ante the same but because of investor demand they will be different.
Tobin q in a y=Ak world
y=Ak
Q=qk
where Q is the value of the company and k is capital.
Where q is assumed to be like 2
Testing for a Greenium
Results from Cost of Capital Wedge Test
Negative numbers indicate greenium
There is a premium in markets if you do good things. Willing to take a lower rate of return / forgo dividend yield.
Testing for a Greenium
Ownership by Types of Institutions
Pension funds, colleges etc tend to go into responsible stocks whereas hedge funds tend to not care.
If it were all about higher returns, hedge funds would be piling in.
The greenium is just a form of carbon tax and we know to solve climate change we need some incentives to get firms to decarbonize
Aggregating Empirical Studies of Greeniums
What is the key conclusion of this graph?
So across all these studies, the greenium is about 1% but the standard deviation is 4% - HUGE.
So we don’t really know what the size of the greenium is.
Mapping to Aggregate Decarbonization Investment
If I see a specific greenium and I know alpha (the fraction of wealth restricted to companies only meeting standards), I can back out how much total spending I should be having.
I see a 1% greenium. Tobin q is 2 so M is going to be something like 2%. So firm spends 2% of capital stock to get 1% greenium. (Equation from earlier)
Then, if 20% of the money is locked up, then each firm has to spend about X = 20% of 2% which is like 0.4%. So the aggregate spending I have is 0.4% of capital. (Equation from this card)
Provide the key insight/conclusion of this graph
The interpretation is that maybe the greenium is not 1% but maybe more like 40-50 bps.
1% might still be showing up in the data because when measuring rates of return between green and brown it’s very sensitive to sampling period. Hard to disentangle true factors.
Green line (suggests 0.3% of capital stock total spending) is too much investment relative to what we actually see (red) which means 1% greenium is too high.
→ 1% might seem large for a greenium but between net zero pledges, swfs and the FT article stuff this likely gives you some greenium even if it’s hard to measure
Explain the relative positioning of these lines
The dotted redline is the actual spending X each year in the US on low carbon alternatives.
Solid green line is what we would have predicted this to be had the greenium been like 1%
The blue line (red on the right axis) is the fraction / number of investors pledging to be green. This suggests a 5 fold increase in number of investors pledging to be green. Alpha is between 5-15%.
