Dissecting Green Returns

55 Pages Posted: 11 Jun 2021 Last revised: 15 Jun 2022

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Multiple version iconThere are 4 versions of this paper

Date Written: June 10, 2022

Abstract

Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the "greenium" widened, and U.S. green stocks outperformed brown as climate concerns strengthened. Despite that outperformance, we estimate lower expected returns for green stocks than for brown, consistent with theory. We estimate expected returns in two ways: ex ante, using implied costs of capital, and ex post, using realized returns purged of shocks from climate concerns and earnings. A theoretically motivated green factor explains much of value stocks' recent underperformance.

Keywords: sustainable investing, ESG, green factor, greenium, green bond

JEL Classification: G11, G12

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F. and Taylor, Lucian A., Dissecting Green Returns (June 10, 2022). Fama-Miller Center Working Paper, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3864502 or http://dx.doi.org/10.2139/ssrn.3864502

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Lucian A. Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

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