Research / BFI Working PaperJun 18, 2021

Dissecting Green Returns

Lubos Pastor, Robert F. Stambaugh, Lucian A. Taylor

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. The factor lags those shocks, curiously, by about a month. A theory-driven two-factor model featuring the green factor explains much of the recent underperformance of value stocks.

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