Many people expect brown stocks to outperform green stocks. However, in reality, things are different – it seems that bad news about climate change can benefit green stocks. Recent research shows how bad climate-related news can temporarily benefit stocks from climate-friendly or green businesses.
While the markets react to news of global warming, investors could become accustomed to the climate change aspect.
A Change Caused by the Demand of Environments, Social and Governance Funds
Ken French and Eugene Fama mentioned that valuations and anticipated returns can be influenced by the preferences and tastes of investors in terms of securities. All of this was discussed in a 2007 study called “Disagreement, Tastes and Asset Prices”.
Many investors like securities with distributions that resemble a lottery, resulting in a higher valuation for the stocks. However, there are arbitrage limits, which do not allow certain investors to fix these overvaluations. As a result, there are poor returns associated with these stocks.
Sustainable Investing in Equilibrium authors Robert Stambaugh, Lubos Pastor, and Lucien Taylor also noticed something similar as a result of sustainable investing growth. According to them, the equilibrium changed due to the higher request for environmental, social, and governance funds.
That being said, companies that have good ESG scores have an increasing weight on their portfolio. As such, their stocks lead to capital gains in the short term. For a while, realized returns grow, while in the long run, expected returns go down.
The authors have said that being exposed to ESG risk is what made brown assets underperform against green assets at times.
Climate Change News Can Suddenly Cause a Rise for Green Firms
The authors of Climate Change Concerns and the Performance of Green Versus Brown Stocks have made an interesting discovery. They said brown firms would underperform against green companies when climate change worries boost for 500 S&P businesses.
So, they took different news articles from 2003 to 2018 that were related to climate change. Then, they chose the sources that managed to reach high numbers of readers, such as the Los Angeles Times, The Washington Post, The New York Post, the New York Daily News, USA Today, The Chicago Tribune, The New York Times, and The Wall Street Journal. All of these sources confirmed their prediction.
Five Themes That Could Affect Green Stocks vs Brown Stocks in Terms of Returns
According to the authors, five specific themes could influence returns for green vs brown stocks. These are:
- Agreement and Summit
- Financial and Regulation
- Disaster
- Research
- Societal Impact
These themes could cause changes in tastes or cash flow expectations.
It has been discovered that green stocks have grown simultaneously with the increase in climate-related news. Also, the researchers found that the green factor was not so prevalent during months that didn’t have climate-concern stocks.
When there isn’t bad climate news, brown stocks might still outperform green ones. So, the increasing green returns are not accurate predictors for the future. But lower capital costs are associated with green companies, having a positive influence on the world as a whole. So, in the future, before you look for Forex brokers accepting deposits via PayPal, you might want to make sure they are green.
