Climate Change Concerns and the Performance of Green Versus Brown Stocks

Abstract

We empirically test the prediction of Pastor, Stambaugh, and Taylor (2020) that green firms outperform brown firms when concerns about climate change increase unexpect- edly, using data for S&P 500 companies from January 2010 to June 2018. To capture unexpected increases in climate change concerns, we construct a Media Climate Change Concerns index using news about climate change published by major U.S. newspapers. We find that when concerns about climate change increase unexpectedly, green firms’ stock prices increase, while brown firms’ decrease. Further, using topic modeling, we con- clude that climate change concerns affect returns both through investors updating their expectations about firms’ future cash flows and through changes in investors’ preferences for sustainability.

Keywords: Asset Pricing, Climate Change, Sustainable Investing, ESG, Greenhouse Gas Emission, Sentometrics, Textual Analysis

JEL Classification: G11, G18, Q54