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

Lucia Alessi, Elisa Ossola and Roberto Panzica

International Review of Financial Analysis, 2023, vol. 90, issue C

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.

Keywords: Climate risk; Environmental disclosure; Conditional factor models; Asset pricing (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 Q01 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:90:y:2023:i:c:s1057521923004143

DOI: 10.1016/j.irfa.2023.102898

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