Sustainability in commodity markets

Abstract

We examine the asset pricing implications of sustainability in commodity markets. We focus on metals and agricultural goods, for which we collect environmental footprint data, namely greenhouse gas emissions and water consumption. We then build green-minus-brown portfolios and find no evidence that sustainability is priced in the cross-section of commodity returns. We also document strong benefits when diversifying equity and bond allocations with low-carbon commodities. Investor welfare, measured by the certainty equivalent return, increases by 22% when the commodity share is 20%. These results reveal the dual  opportunities, both financial and environmental, brought by low footprint commodities.

Keywords: Green commodities, diversification, asset pricing, Environmental footprint, Sustainability, Investor welfare

JEL Classification: G11, G12, Q02, G13, Q54