Green Factor in Stock Returns

Is outperformance of green (environmentally friendly) stocks relative to brown (not environmentally friendly) stocks due to firm performance or concern about the climate? In other words, do green stocks carry a climate concern premium? In their June 2021 paper entitled “Dissecting Green Returns”, Lubos Pastor, Robert Stambaugh and Lucian Taylor examine relative performance of green and brown stocks in the context of unexpectedly strong increases in environmental concerns (climate concern jumps). Specifically, they:

• Construct a green factor as the return on a portfolio that is each month long (short) green (brown) stocks weighted by greenness based on environment-focused elements of MSCI ESG Ratings.
• Devise and test a 2-factor (market and green) model of stock returns.
• Compute a monthly measure of public climate concern based on an associated media index, with focus on series jumps.

Using stock return and factor data during November 2012 (based on availability of ESG ratings) through December 2020 and climate concern data during November 2012 through June 2018, they find that: (more…)