Dissecting Green Returns
42 Pages Posted: 11 Jun 2021
Date Written: June 10, 2021
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. To show the latter, we construct a theoretically motivated green factor—a return spread between environmentally friendly and unfriendly stocks—and find that its positive performance disappears without climate-concern shocks. The factor lags those shocks, curiously, by about a month. A theory-driven two-factor model featuring the green factor explains much of the recent underperformance of value stocks.
Keywords: sustainable investing, ESG, green factor, greenium
JEL Classification: G11, G12
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