Dissecting Green Returns
58 Pages Posted: 14 Jul 2021 Last revised: 23 Jun 2022
Date Written: June 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. 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: ESG, green bonds, green factor, greenium, sustainable investing
JEL Classification: G11, G12
Suggested Citation: Suggested Citation