This paper analyses the expected return of green securities relative to brown, which is a crucial impact measure for ESG investors. The equity greenium has become more negative over time. The literature contains a wide range of greenium estimates, and these estimates vary tremendously across papers. The various papers even disagree on whether green stocks have under or outperformed.

Replication problems with realized returns and green confusion

The methodology of using realised returns to estimate equity greenium has been found to be unreliable due to replication problems. A more precision approach combining robust green score with forward-looking expected returns can yield robust estimates of equity greenium.

The greenium beyond equities

The paper estimates the greenium for corporate bonds, the weighted-average cost of capital (WACC), and sovereign bonds. The greenium is more negative in greener countries. The findings suggest that lowering the cost of capital for green firms relative to brown through ESG investing can be effective in lowering perceived environmental risks and improving the environment.

Recommendations

The paper recommends using a robust green score combined with forward-looking expected returns to estimate the equity greenium. The expected return of green securities relative to brown is a crucial impact measure for ESG investors and provides insight into how cost of capital can be lowered for green firms relative to brown. This can lead to improvements in environmental risk and overall investment outcomes.