Work

When green turns brown: Green premium revisited

Year: 2025

Type: article

Abstract: We investigate the green premium in Australia’s equity market. Using 13 years’ worth of data from 2010 to 2023, we find an initial cumulative 118 percent green premium over our sample period (9.1 percent annually), which reduces to only 30 percent (2.3 percent annually) after orthogonalizing greenness scores for firm characteristics. Asset pricing tests suggest the green premium in Australia is largely explained by known risk factors. Critically, excluding carbon-intensive industries and using orthogonalized greenness scores reveals a "brownium" – brown stocks have outperformed the green stocks cumulatively by 47 percent over our sample period (3.6 percent annually). Our results demonstrate that environmental risk pricing requires careful consideration to separate confounding firm characteristics from ESG ratings which determine whether firms are classified as green or brown, with implications for ESG investing in economies with high concentration of carbon-intensive industries.

Source: Finance research letters

DOI: 10.1016/j.frl.2025.108298

Authors: Iengchuo Tang, Roshanthi Dias, Di Mo, Xiao Tian

Institutions: Swinburne University of Technology, RMIT University

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: $3,730