Brown Assets for the Prudent Investor

forthcoming Harvard Business Law Review Online, Fall 2021

31 Pages Posted: 2 Aug 2021 Last revised: 22 Sep 2021

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

J.B. Heaton

One Hat Research LLC

Date Written: September 21, 2021

Abstract

Most commentary on climate-themed investment treats climate change as a one-way risk to brown
assets from a hoped-for transition to a low-carbon economy. But the converse holds as well. Brown assets could turn out to be highly valuable if the world fails to transition out of the high-carbon economy. This is true both because sentiment for green assets may cause brown assets to be underpriced (generating higher expected returns) and because brown assets may provide a valuable hedge against the costs of climate change in a world that failed to transition to a low-carbon economy. Given the lack of progress to date toward transition to a low-carbon economy, we argue that institutional investors subject to fiduciary duties of prudent investment (including the duty to diversify) cannot yet justify divestment from brown assets.

Keywords: climate change, carbon risk, ESG, global warming

Suggested Citation

Brav, Alon and Heaton, J.B., Brown Assets for the Prudent Investor (September 21, 2021). forthcoming Harvard Business Law Review Online, Fall 2021, Available at SSRN: https://ssrn.com/abstract=3895887 or http://dx.doi.org/10.2139/ssrn.3895887

Alon Brav

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

J.B. Heaton (Contact Author)

One Hat Research LLC ( email )

Chicago, IL
United States
(312) 257-3900 (Phone)

HOME PAGE: http://www.onehatr.com/

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