DP16260 Dissecting Green Returns
|Author(s):||Lubos Pástor, Robert F. Stambaugh, Lucian Taylor|
|Publication Date:||June 2021|
|Date Revised:||September 2021|
|Keyword(s):||ESG, green factor, greenium, sustainable investing|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16260|
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. To show the latter, we construct a theoretically motivated green factor---a return spread between environmentally friendly and unfriendly stocks---and find that its positive performance disappears without climate-concern shocks. A theory-driven two-factor model featuring the green factor explains much of the recent underperformance of value stocks. Our evidence also suggests small stocks underreact to climate news.