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Where is the carbon premium? Global performance of green and brown stocks

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Listed:
  • Bauer, Michael
  • Huber, Daniel
  • Rudebusch, Glenn
  • Wilms, Ole

    (Tilburg University, School of Economics and Management)

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.
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Suggested Citation

  • Bauer, Michael & Huber, Daniel & Rudebusch, Glenn & Wilms, Ole, 2022. "Where is the carbon premium? Global performance of green and brown stocks," Other publications TiSEM 6b117156-316d-440a-9fa5-b, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:6b117156-316d-440a-9fa5-b005b19eeb9b
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    References listed on IDEAS

    as
    1. Florian Berg & Julian F Kölbel & Roberto Rigobon, 2022. "Aggregate Confusion: The Divergence of ESG Ratings [Corporate social responsibility and firm risk: theory and empirical evidence]," Review of Finance, European Finance Association, vol. 26(6), pages 1315-1344.
    2. Patrick Bolton & Zachery Halem & Marcin Kacperczyk, 2022. "The Financial Cost of Carbon," Journal of Applied Corporate Finance, Morgan Stanley, vol. 34(2), pages 17-29, June.
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    Citations

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    Cited by:

    1. Martijn A. Boermans & Maurice Bun & Yasmine van der Straten, 2024. "Funding the Fittest? Pricing of Climate Transition Risk in the Corporate Bond Market," Working Papers 797, DNB.
    2. Zhikai Zhang & Yaojie Zhang & Yudong Wang & Qunwei Wang, 2024. "The predictability of carbon futures volatility: New evidence from the spillovers of fossil energy futures returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(4), pages 557-584, April.
    3. Shen, Yiran & Sun, Xiaolei & Ji, Qiang & Zhang, Dayong, 2023. "Climate events matter in the global natural gas market," Energy Economics, Elsevier, vol. 125(C).
    4. Beyer, Victor & Bauckloh, Michael Tobias, 2024. "Non-standard errors in carbon premia," CFR Working Papers 24-06, University of Cologne, Centre for Financial Research (CFR).
    5. Christoph Hambel & Holger Kraft & Frederick van der Ploeg, 2024. "Asset Diversification Versus Climate Action," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1323-1355, August.
    6. Long, Huaigang & Chiah, Mardy & Cakici, Nusret & Zaremba, Adam & Bilgin, Mehmet Huseyin, 2024. "ESG investing in good and bad times: An international study," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    7. Michael D. Bauer & Eric A. Offner & Glenn D. Rudebusch, 2023. "The Effect of U.S. Climate Policy on Financial Markets: An Event Study of the Inflation Reduction Act," CESifo Working Paper Series 10739, CESifo.
    8. Zhang, Li & Liang, Chao & Huynh, Luu Duc Toan & Wang, Lu & Damette, Olivier, 2024. "Measuring the impact of climate risk on renewable energy stock volatility: A case study of G20 economies," Journal of Economic Behavior & Organization, Elsevier, vol. 223(C), pages 168-184.
    9. Boubaker, Sabri & Choudhury, Tonmoy & Hasan, Fakhrul & Nguyen, Duc Khuong, 2024. "Firm carbon risk exposure, stock returns, and dividend payment," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 248-276.
    10. Zanin, Luca, 2023. "A flexible estimation of sectoral portfolio exposure to climate transition risks in the European stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    11. Dirk Broeders & Marleen de Jonge & David Rijsbergen, 2024. "The European Carbon Bond Premium," Working Papers 798, DNB.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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