The Greenium

How much do investors gain or sacrifice by focusing their portfolios on “sustainable” (green) stocks? In their March 2024 paper entitled “In Search of the True Greenium”, Marc Eskildsen, Markus Ibert, Theis Jensen and Lasse Pedersen broadly examine the green-minus-brown premium (the greenium). Specifically, they:

• Replicate and extend past studies to estimate the U.S. equity greenium in 230 ways based on realized returns, encompassing: 23 firm greenness metrics; estimates with or without industry-neutrality; and, five ways of adjusting for risk.
• Generate estimates of the greenium in each of 48 countries also using realized returns, each firm greenness metric and each way to adjust for risk.
• Construct a robust firm greenness score by averaging key greenness metrics from leading data providers and estimate the greenium using expected (instead of realized) returns based on each firm’s implied cost of capital. For robustness, they consider other ways to model expected returns.

They also estimate the greenium for U.S. corporate bonds. Using the specified data as available during August 2009 through December 2022, they find that: (more…)