The pricing of transition risk in financial markets: does a "brownium" exist in the European Energy Sector?

Abstract

This study contributes to providing evidence to answer the question: are the financial markets correctly and efficiently pricing the transition risk of the firms in the European Energy Sector? We selected the riskier firms, based on an index constructed considering the environmental impact and their ESG ratings. Then we compared their rate of return with the one of the more sustainable ones. We used a multiple factor model to understand if the spread between the sustainable and the unsustainable firms is actually caused by environmental factors and if this difference is systematically priced by the financial markets. The analysis points to the conclusion, proven also by the existing literature, of a mixed evidence. It exists a "brownium" and that the financial markets are reflecting the risk of the transition to a low carbon economy, but not in a consistent way. We conclude stating the importance of public policies to accelerate the transition process.