The Green Permium Paradox

This paper looks at what we call the "Green Premium Paradox". This is when everydayinvestors pay extra for stocks labeled as ESG (which means environmentally friendly,social, or well-governed) without really checking if the company's sustainability claims aretruthful or comparable with others. Based on ideas from behavioural finance (whichstudies how people make financial decisions), we argue that this price difference is notbecause these companies are actually safer. Instead, it happens because companiesoften report their sustainability data in an unclear way. We made a four-step model that connects the quality of a company’s ESG reporting(measured by our new Disclosure Fidelity Index) to how much investors will pay for itsstock. We also introduce something called the "Green Accounting Illusion", a bias whereinvestors mistake more information for better information. To test our ideas, we use thereal-world example of new global sustainability standards (IFRS S1 and S2) beingadopted at different times in different countries. Finally, we offer policy suggestions: weshould require companies to use common reporting standards, have independent checkson sustainability data, and design disclosures so they are easier for everyday investors tounderstand.