The Role of a Green Factor in Stock Prices. When Fama & French Go Green
39 Pages Posted: 24 Mar 2022
Date Written: March 23, 2022
Concerns about climate change are now widespread, and the risks for financial assets have become more evident. Investors are increasingly aware of the need to incorporate climate-related considerations in their investment decisions. All this has had an impact on market valuations. In this paper, we extend the framework of the factor models that explain the expected return of stock models to include a climate change exposure factor. To do so, we built a portfolio that is long on companies with low carbon emissions, and short on companies with high carbon emissions. We show that this factor is relevant in the market and allows for an approximation of the climate change exposure of firms with poor disclosure of their green performance. Thus, the betas of this factor could be a useful tool for investors that wish to incorporate these aspects in the management of their portfolios and analysts interested in corporate exposure to climate change risks.
Keywords: climate change, carbon footprint, factor model, asset pricing, disclosure
JEL Classification: G12, Q54, G24
Suggested Citation: Suggested Citation