The Future of Emissions
57 Pages Posted: 19 Oct 2022 Last revised: 26 Oct 2022
Date Written: October 7, 2022
We argue for the introduction of firm-level emission futures contracts as a novel way of assessing the real impact of ESG initiatives. Our measure is based on the forward-looking market-based valuation of firm-level CO2 emissions. We establish both theoretically and empirically that backward-looking subjective ratings are limited to the extent that they fail to capture future reductions in emissions. We show evidence that although lower emissions have predicted higher E ratings, higher E ratings have predicted higher, not lower, emissions. As such, by following these subjective ratings, investors may have inadvertently allocated their money to firms that pollute more, not less. We discuss several applications of our new measure, including executive pay and investment management.
Keywords: Emission Futures, ESG Measurement, Externalities, Environmental, CO2 Emission Reductions, Real Impact, Green Washing, Cheap Talk, Green Misallocation, Executive Remuneration, Green Fund Management
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