Working Papers

Are financial markets pricing the net zero carbon transition? 

Job Market Paper

The transition to net-zero carbon emissions poses substantial risk for high-carbon-emitting firms. Research has documented a positive correlation between realised returns and carbon emissions, suggesting that financial markets price such transition risk. This study explores how investors’ expectations of firms’ future growth relate to transition risk. Using analysts’ forecasts and carbon-emissions data, I find that analysts’ earnings per share growth forecasts – as a proxy for investors’ cash-flow expectations – are positively associated with the level of carbon emissions (unscaled) and emission intensity (scaled). Investors remain more optimistic about the growth of cash-flow of high-carbon-emitting firms compared to low-carbon-emitting firms even after the Paris Agreement. This evidence casts doubts on financial markets pricing a transition to net-zero carbon emissions without credible government action.

The evolving academic field of climate finance

With Peter Tufano, Harvard Business School Working Paper

The urgency and the magnitude of climate change will affect every aspect of our economies, societies, and planet. The academic finance research has begun to study the financial implications of global warming, although this body of literature is small. The field has distinct geographic tilts, draws young researchers, and much remains outside of the traditional finance domain. We explore, quantitatively and qualitatively, the emerging field of climate finance. We discuss its relevance for finance research and teaching and provide implications for financial economist and practitioners — in particular the need to incorporate this massive externality in valuation and risk analyses. 

Published Papers

Model-based financial regulations impair the transition to net-zero carbon emissions

With Matthew C. Ives, Ben Carr, Sophie Fry & Eric Beinhocker, Nature Climate Change

Investments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments. 

Practice Papers

When Climate Collaboration Is Treated as an Antitrust Violation

With Peter Tufano and Knut Haanaes, Harvard Business Review

Carbon emissions transcend firms and borders—they are a massive, unpriced externality. Companies across industries are increasingly waking up to the need to cooperate in the fight against climate change but the law might get in the way. Across Europe and the U.S., regulators are discussing whether corporate climate collaborations violate antitrust law. Companies need to keep an eye on this debate, and regulators should strive to incorporate the effect of a partnership on emissions into antitrust considerations.

To Earn Trust, Climate Alliances Need to Improve Transparency

With Peter Tufano, Chris Thomas, Knut Haanaes, Robert Eyres, and Chris Chapman, Harvard Business Review

Businesses are increasingly joining together as part of climate alliances to accelerate the transition away from fossil fuels. But these alliances raise antitrust issues: When competitors collaborate, it can come at the expense of customers or workers. To mitigate these concerns, climate alliances need to invest in voluntary disclosure to build trust among policymakers and the public.

The Case for Climate Alliances

With Peter Tufano, Knut Haanaes, Emily Tedards, Stanford Social Innovation Review

Business leaders are under pressure to address the climate crisis, but they can’t do so alone. Climate alliances can help leaders and firms be more ambitious, responsible, and effective in driving the systems change necessary to save the planet.

World Development Report 2024

World Bank Group