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
Date Written: September 21, 2021
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
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