Do sustainable investments perform better?
Sustainable Investing
Much of Wall Street has assumed ‘Green’ investments perform better than ‘Brown’ investments. Moreover, some studies have shown that over the long term, sustainable and socially responsible investments, including green investments, performed similarly to or better than traditional investments. However, is that really the case?
We came across a great paper from Professor David Ardia of HEC Montreal examining the true performance of the two classes of stock. And furthermore why a divergence occurred.
Professor Ardia worked along with, Keven Bluteau, Kris Boudt & Koen Inghelbrecht & the paper is worth a read:
Climate Change Concerns and the Performance of Green vs. Brown Stocks
Paper Abstract
We empirically test the prediction of Pástor et al. (2021) that green firms outperform brown firms when concerns about climate change increase unexpectedly, using data for S&P 500 companies from January 2010 to June 2018. To capture unexpected increases in climate change concerns, we construct a daily Media Climate Change Concerns index using news about climate change published by major U.S. newspapers and newswires.
We find that on days with an unexpected increase in climate change concerns, the green firms’ stock prices tend to increase, whereas brown firms’ prices decrease. Furthermore, using topic modeling, we conclude that this effect holds for concerns about both transition and physical climate change risk. Finally, we decompose returns into cash flow and discount rate news components. In addition find that an unexpected increase in climate change concerns is associated with an increase (decrease) in the discount rate of brown (green) firms.
