Working Paper: CEPR ID: DP16260
Authors: Lubo Pstor; Robert F. Stambaugh; Lucian Taylor
Abstract: 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. Despite that outperformance, we estimate lower expected returns for green stocks than for brown, consistent with theory. We estimate expected returns in two ways: ex ante, using implied costs of capital, and ex post, using realized returns purged of shocks from climate concerns and earnings. A theoretically motivated green factor explains much of value stocks' recent underperformance.
Keywords: sustainable investing; ESG; green factor; greenium; green bonds
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased environmental concerns (F64) | outperformance of green assets (G19) |
| outperformance of green stocks (O44) | shocks in climate concerns (Q54) |
| shocks in climate concerns (Q54) | returns of green assets (G12) |
| neutralization of climate shocks (Q54) | expected performance of green stocks (G17) |
| equity greenium (Q56) | expected return difference between green and brown stocks (G40) |
| industry-level greenness (L99) | superior performance of green stocks (O44) |
| individual stock greenness (Q56) | performance of green stocks (O44) |