Expected Returns to Brown and Green Assets with Transition Uncertainty

Prominent institutional investors argue that climate transition - moving from a high-carbon economy to a low-economy - creates investment opportunities in green assets and casts doubt on the viability of brown assets. This simplistic view overlooks the fact that an asset's impact on climate change does not determine its expected returns. Expected returns depend, as always, on payoffs, probabilities, and preferences. Contrary to the promises of climate-themed investment sellers, simple financial analysis suggests that brown firms may outperform green firms in a large number of scenarios, whether or not the low-carbon transition succeeds or fails.