Climate Change Concerns and the Performance of Green Versus Brown Stocks

Abstract

We empirically test the prediction of Pastor, Stambaugh, and Taylor (2021) that green firms outperform brown firms when concerns about climate change increase unexpectedly, using data for S&P 500 companies from January 2010 to June 2018. To capture unexpected increases in climate change concerns, we construct a daily Media Climate Change Concerns index using news about climate change published by major U.S. newspapers and newswires. We find that on days with an unexpected increase in climate change concerns, the green firms’ stock prices tend to increase while brown firms’ prices decrease. Further, using topic modeling, we conclude that this effect holds for concerns about both transition and physical climate change risk. Finally, we decompose returns into cash flow and discount rate news components and find that an unexpected increase in climate change concerns is associated with an increase (decrease) in the discount rate of brown (green) firms.

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

JEL Classification: G11, G18, Q54