Unraveling the Paradox: Green Premium and Climate Risk Premium in Sustainable Finance

Sustainable investing has gained significant momentum in recent years, driven by increasing awareness of environmental and social issues, as well as evolving regulatory frameworks. However, two key concepts within this domain, Green Premium and Climate Risk Premium remain central to discussions about the long-term viability and profitability of sustainable investments. This paper examines the paradox between the Green Premium, which often reflects the added cost of investing in environmentally sustainable assets, and the Climate Risk Premium, which reflects the compensation investors require for bearing climate-related risks. The Green Premium is typically associated with investments that aim to promote environmental sustainability, such as renewable energy projects, green infrastructure, and sustainable agriculture. Conversely, the Climate Risk Premium arises from the uncertainty surrounding climate-related risks, including regulatory changes, extreme weather events, and physical climate impacts that could affect asset values and returns. Although both premiums are linked to environmental considerations, they often appear to conflict, as green investments tend to come with higher upfront costs, while climate-risk-adjusted assets demand higher returns due to their inherent risk. This paper explores the dynamics between these premiums, analyzing their impact on the decision-making process of investors, and the implications they have for portfolio management in sustainable investing. Through this exploration, we aim to shed light on the trade-offs involved in achieving green objectives without compromising financial returns. By understanding how these two premiums interact, investors can better navigate the challenges of sustainable investment strategies