Work

When do investors go green? Evidence from a time-varying asset-pricing model

Year: 2023

Type: article

Abstract: This study employs individual stock returns to examine the evolution of the greenium, which is the risk premium linked to firms’ carbon emissions and environmental transparency. We estimate an asset-pricing model with time-varying risk premia, in which the greenium is associated with a priced ‘greenness and transparency’ factor. We show that investors in the European equity market tend to accept lower returns, ceteris paribus, and hold greener and more transparent assets when economic shifts toward low carbon become more credible. This occurred after the Paris Agreement, the first global climate strike, and the announcement of the EU Green Deal. Opposite signals, such as increases in the prices of oil or critical minerals for the low-carbon transition, are associated with increases in the greenium; that is, more polluting firms are perceived as less risky.

Source: International Review of Financial Analysis

DOI: 10.1016/j.irfa.2023.102898

Authors: Lucia Alessi, Elisa Ossola, Roberto Panzica

Institutions: European Commission, Joint Research Centre, University of Milano-Bicocca

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: hybrid

Estimated APC paid: $3,150