Financial economics of the transition to a low-carbon economy

Thesis

The transition to a low-carbon economy demands the replacement of carbon-intensive capital at unprecedented scale. Whether that replacement proceeds credibly depends on how well commitments can be assessed, progress measured, and financial instruments priced accordingly. This thesis examines these questions through three papers. The first paper develops a scoring rule for climate transition plans in sectors where emissions are difficult to abate, weighting disclosed components according to their statistical association with observed changes in emissions intensity. The second paper examines which sustainability performance metrics financial professionals find most useful, drawing on an industry survey to identify persistent frictions in assurance, comparability, and institutional capacity. The third paper develops a theoretical valuation framework for sustainability-linked bonds, instruments whose financial terms are contingent on the issuer’s environmental performance. Grounded in a stochastic-volatility process, the framework treats sustainability performance as a priced state variable, capturing its evolving uncertainty alongside interest-rate and credit risk. Numerical illustrations drawn from landmark corporate and sovereign issuances suggest how contract design and data quality shape the sensitivity of spreads to transition credibility. Taken together, the three papers offer a framework for the economics of the transition: one that connects planning to measurement, and measurement to valuation.

Authors: Reséndiz García, JL

• DOI: 10.5287/ora-exdz9oxpg
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: asset pricing; bond interest rates; climate; global warming; sustainability; environmental accounting