New research by Norges Bank, which manages the assets of the $1.39 trillion Norwegian sovereign wealth fund, examines how the increased focus on ESG issue can affect asset prices.
It looks at two modelling frameworks to explore how the the increased focus on ESG issues can affect asset prices, showing that when investors incorporate ESG into their portfolios as a non-financial considerations this leads to lower expected returns on higher ESG-scoring “green” assets and higher expected returns on “brown” assets.
It also shows that as more ESG-motivated investors are in the market, increased flows in to green assets can lead to outperformance.
Important the research by Norges, which owns 1.5 per cent of all the world’s stock, also considers how asset prices are affected when ESG measures reflect risks to assets’ expected cash flows. It looks at how the pricing of assets reflects how their payoffs relate to the state of the economy in different climate scenarios.