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The role of a green factor in stock prices. When Fama & French go green

Author

Listed:
  • Ricardo Gimeno

    (Banco de España)

  • Clara I. González

    (Banco de España)

Abstract

Concerns about climate change are now widespread, and the risks for financial assets have become more evident. Investors are increasingly aware of the need to incorporate climate-related considerations in their investment decisions. All this has had an impact on market valuations. In this paper, we extend the framework of the factor models that explain the expected return of stock models to include a climate change exposure factor. To do so, we built a portfolio that is long on companies with low carbon emissions, and short on companies with high carbon emissions. We show that this factor is relevant in the market and allows for an approximation of the climate change exposure of firms with poor disclosure of their green performance. Thus, the betas of this factor could be a useful tool for investors that wish to incorporate these aspects in the management of their portfolios and analysts interested in corporate exposure to climate change risks.

Suggested Citation

  • Ricardo Gimeno & Clara I. González, 2022. "The role of a green factor in stock prices. When Fama & French go green," Working Papers 2207, Banco de España.
    • Handle: RePEc:bde:wpaper:2207
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    File URL: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/22/Files/dt2207e.pdf
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    References listed on IDEAS

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    Cited by:

    1. Philippe Loyson & Rianne Luijendijk & Sweder van Wijnbergen, 2023. "The pricing of climate transition risk in Europe’s equity market," Working Papers 788, DNB.
    2. Philippe Loyson & Rianne Luijendijk & Sweder van Wijnbergen, 2023. "The pricing of climate transition risk in Europe’s equity market," Tinbergen Institute Discussion Papers 23-041/IV, Tinbergen Institute.

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    More about this item

    Keywords

    climate change; carbon footprint; factor model; asset pricing; disclosure;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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