When Do Investors Go Green? Evidence from a Time-Varying Asset-Pricing Model

This paper studies the evolution of the greenium, i.e. a risk premium linked to firms’ carbon emissions and environmental transparency, based on individual stock returns. We estimate an asset pricing model with time-varying risk premia, where the greenium is associated with a priced ‘greenness and transparency’ factor. We show that investors in the European equity market tend to accept lower returns, ceteris paribus, to hold greener and more transparent assets when the shift of the economy towards low-carbon becomes more credible. This happened after the Paris Agreement, the first Global Climate Strike, and the announcement of the EU Green Deal. Signals going in the opposite direction, such as oil price increases and increases in the price of critical minerals for the low-carbon transition, are associated with increases in the greenium