Working Paper: CEPR ID: DP17824
Authors: Michael Bauer; Daniel Huber; Glenn Rudebusch; Ole Wilms
Abstract: The relative equity pricing of more climate-friendly ("green") versus less climate-friendly ("brown") companies is an open question in climate finance. Previous research comes to conflicting conclusions, documenting either a "carbon premium" with brown stocks yielding higher returns, or the opposite, with green stocks outperforming brown. This paper provides new international evidence on this issue for a range of methodologies. Using carbon dioxide (CO2) emissions as reported by companies to measure their greenness, we document that green stocks across the G7 have generally provided higher returns than brown stocks for much of the past decade. We also try to reconcile our findings with previous work, and we provide some results for early 2022 that show that brown stocks outperformed green ones during the energy crisis.
Keywords: climate risk; transition risk; carbon emissions; green stocks; brown stocks
JEL Codes: G11; G12; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| green stocks (Q48) | higher returns (G12) |
| brown stocks (L66) | lower returns (G19) |
| green portfolios (Q48) | outperformance of brown portfolios (G11) |
| firm characteristics and past returns (L25) | observed green outperformance (G14) |
| energy crisis of early 2022 (Q41) | reversal of trend (P27) |