Navigating Climate Risks : Clean Tech vs Fossil Fuel ETFs

Using non-parametric estimates with imposing inequality restrictions, we compare unconditional to conditional estimators for “green” and “brown” ETFs, namely fossil fuel, and clean energy. Specifically, while unconditional tests could not indicate that the “green” outperforms the “brown”, the outperformance of the “green” is statistically significant in conditional testing incorporating climate-related information. Similarly, the conditional tests show that “brown” ETFs are riskier than “green” ETFs, especially downside risk beta. Interestingly, we document that non-fundamental demand proxied by fund flows for the “green” is higher than that for the “brown” only when incorporating the relevant information in the test. In general, we provide formal tests on controversial questions about the “green” and “brown” assets