Risk-adjusted investment performance of green and black portfolios and impact of toxic divestments in emerging markets

Environmental degradation is a global concern that warrants cooperative efforts from multiple stakeholders. In this context, responsible finance is critical to help achieve the sustainability targets and foster transition to net-zero emissions. However, to encourage green finance, investors must receive some incentives, and this paper explores if there are any benefits for the market participants. We have employed a comprehensive sample of firms from the BRICS for ten years and sorted them into black and green portfolios using multiple constructs. The comparative assessment of these portfolios shows that green stocks dominate their black counterparts, and the dominance was robust across adjusted Sharpe and Sortino ratios and Jensen's alpha. Our evidence also demonstrates that rebalancing of the portfolios due to changing ecological characteristics results in successful market timing for the green portfolios. Finally, the results suggest that the divestment of fossil fuel stocks, firms with lower environmental scores, high carbon intensity, and low sustainable revenues provide investment benefits. These findings are very encouraging for the evolution of green finance in emerging markets and have important implications for market participants.