Conference Agenda

I estimate climate discount rates by calibrating the present value of expected energy savings from greener dwellings to the corresponding price premium. I link seven million residential real estate transactions in the United Kingdom to the sustainability ratings of the underlying dwellings and demonstrate that homeowners price dwelling sustainability following economic principles. Homeowners apply lower rates to discount marginal energy savings from subsequently greener dwellings. Differences in capital constraints, heterogeneity in climate beliefs, regulatory uncertainty associated with lower-rated dwellings, and uncertainty of marginal savings from lower-rated dwellings do not explain the declining cross-sectional structure of the discount rates with increasing dwelling sustainability. Thus, homeowners derive non-pecuniary benefits from holding greener dwellings, and these benefits become more salient with increasing dwelling sustainability. This interpretation is supported by the increase in unprofitable investments to have ratings improved for dwellings not impacted by the regulation imposing a minimum energy efficiency standard.

I develop an asset-pricing framework in which climate premia depend on the price of risk and on how firm characteristics map into cash-flow exposure. Which characteristics are priced is therefore a question about economic mechanisms, not proxy selection. The framework characterizes when a scalar characteristic is sufficient for priced exposure: normalized exposure must be measurable with respect to that characteristic. Applying this criterion to emission intensity yields two testable implications, spanning and scale invariance. Both are rejected in international firm-level data: the intensity premium varies with firm size, and emission levels carry independent information conditional on firm value.

We investigate how individuals interpret corporate sustainability disclosures in a pre-registered survey experiment. Participants can distinguish greener from browner firms better than applying uninformed guessing, but their assessments are systematically compressed toward the middle of the scale. This compression is asymmetric: respondents overestimate the greenness of browner firms but they underestimate the greenness of greener firms even more strongly. The pattern is the same among finance professionals or sustainability experts, suggesting that expertise alone does not resolve the interpretation problem. We then examine how disclosure design can mitigate these errors. Providing benchmark information, presenting emissions in relative terms, and translating emissions into familiar metrics improve participants’ ability to distinguish firm greenness.