Working Paper: NBER ID: w28940
Authors: Lubos Pastor; Robert F. Stambaugh; Lucian A. 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: Green Assets; Sustainable Investing; Climate Concerns; Expected Returns; Realized Returns
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased climate concerns (Q54) | higher demand for green assets (G19) |
| higher demand for green assets (G19) | higher realized returns (G19) |
| higher realized returns (G19) | lower expected returns (G19) |
| green assets (Q48) | lower expected returns than brown assets (G19) |
| climate shocks (Q54) | performance of green versus brown stocks (G40) |
| outperformance of green stocks (O44) | not indicative of future performance (G19) |
| equity greenium (Q56) | expected return differential between green and brown stocks (G40) |