In Search of the True Greenium

Abstract

The greenium—the expected return differential between green and brown securities—is central to climate finance. Based on an asset pricing model in which investors hold heterogeneous views about each firm’s greenness, we show how an “aggregate green score” can be inferred from green investors’ portfolios. The aggregate green score is the green score with the most negative greenium and exact pricing, while any other greenium is determined by the correlation between its corresponding green score and the aggregate one. Consistent with the theory, the greenium corresponding to the aggregate green score is more negative in greener countries and over time.

Keywords: Greenium, cost of capital, ESG, replication, climate, sustainable finance

JEL Classification: G11, G12, H23, Q5