The Greenium matters : evidence on the pricing of climate risk

This study provides evidence on the existence of a negative Greenium, i.e. a green risk premium, based on European individual stock returns and portfolios. By defining a green factor which is priced by the market, we offer a tool to assess a portfolio exposure to climate risk and hedge against it. We estimate that even in a rather benign scenario, there would be losses at the global level, including for European large banks, should they fail to price the Greenium. By halving the exposure to carbon-intensive sectors, losses would be reduced by 30%. These results call for the introduction of carbon stress tests for systemically important institutions.