ESG/Climate vs conventional indices: Their difference in climate premium

• Green finance (change of capital costs) contributes little to climate change. • We measure climate premiums for MSCI ESG/climate and their parent indices. • The difference (impact) is 2.4 bps on average (significant, but insufficient). • Index themes do not matter, concentration does. Green finance will lower carbon emissions if it increases the capital costs of polluting firms. For this transition, substantial green capital is necessary. Climate Change and ESG indices play an essential role in this regard. They serve as ESG or climate investors’ benchmarks and can guide the required investment flows. However, what is the actual impact of these indices? Our paper shows that popular ESG/climate indices display statistically significant yet economically insufficient changes in capital costs relative to their respective parent indices. Without a sufficient discount on capital costs, these investments will not lead to the hoped-for changes in corporate investment projects.