The role of a green factor in stock prices: when Fama and French go green

Ricardo Gimeno and Clara I. González
Authors registered in the RePEc Author Service: Clara I. Gonzalez

Journal of Credit Risk

Abstract: For investors, climate change considerations have become pivotal, yet the absence of uniform standards and comprehensive data complicates the possibility of making informed investment strategies. By incorporating a green factor into the conventional framework for explaining stock returns, we can capture climate transition risk exposure. To do this we construct a portfolio that favors low carbon-emitting companies over their high carbon-emitting counterparts. Our findings reveal the factor’s market significance. Notably, this green factor serves as a proxy for the climate readiness of nondisclosing companies, making it an effective tool for investors to gauge climate change exposure. This research, therefore, bridges a crucial informational gap, aiding both portfolio management and the analysis of corporate climate risk exposure.

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