The Monetary Channel of the Green Premium

Abstract

I document three novel empirical facts about the green premium, which refers to the average return of the Green-Minus-Brown (GMB) portfolio. First, I show that the green premium varies substantially over time, where greenness can be measured either by Trucost carbon emission intensities or by MSCI environmental scores. The green premium ranges from -53 bps to 76 bps on a monthly basis across different sample periods, when greenness is measured by carbon emission intensities. Risk-adjusted returns also vary substantially over time with a similar pattern. Second, I find that the green premium strongly correlates with the monetary cycle, characterized by the level and trend of interest rates, in low frequency. The green premium is positive and significant during periods of expansionary monetary policy and turns zero or even negative during periods of contractionary monetary policy. Third, using a high-frequency identification strategy, I establish that the conduct of monetary policy has differential causal impacts on stock returns of green and brown firms in high frequency.

Keywords: green premium, green investing, climate finance, monetary policy