When Do Investors Go Green? Evidence From a Time-Varying Asset-Pricing Model

37 Pages Posted: 4 Mar 2022

See all articles by Alessi Lucia

Alessi Lucia

Joint Research Center of the European Commission; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Elisa Ossola

University of Milano-Bicocca

Roberto Panzica

Joint Research Center of the European Commission

Date Written: 31 12, 2021

Abstract

This paper studies the evolution of the greenium, i.e. a risk premium linked to firms' greenness and environmental transparency, based on individual stock returns. We estimate an asset pricing model with time-varying risk premia, where the greenium is associated to a priced `greenness and transparency' factor, which considers both companies' greenhouse gas emissions and the quality of their environmental disclosures. We show that investors in the European equity market tend to accept lower returns, ceteris paribus, to hold greener and more transparent assets when the shift of the economy towards low-carbon becomes more credible. This happened after the Paris Agreement, the first Global Climate Strike and the announcement of the EU Green Deal. Signals going in the opposite direction, such as the US withdrawal from the Paris Agreement, increasing fossil fuel prices and more bad news about climate change, are associated with increases in the greenium.

Keywords: Climate risk, environmental disclosure, conditional factor models, asset pricing

JEL Classification: G01; G11; G12; Q01.

Suggested Citation

Lucia, Alessi and Ossola, Elisa and Panzica, Roberto, When Do Investors Go Green? Evidence From a Time-Varying Asset-Pricing Model (31 12, 2021). Available at SSRN: https://ssrn.com/abstract=4011068 or http://dx.doi.org/10.2139/ssrn.4011068

Alessi Lucia

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Ispra (VA), I-21027
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Elisa Ossola

University of Milano-Bicocca ( email )

Belgium

Roberto Panzica (Contact Author)

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Ispra (VA), I-21027
Italy
93100 (Fax)

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