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The Role of a Green Factor in Stock Prices. When Fama & French Go Green

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252
Author
Ricardo Gimeno Clara I. Gonzalez
Category
Financial
Date Posted
2022/03/23
Date Retrieved
2022/05/12
Date Revised
Empty
Date Written
2022/03/23
Description
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.
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JEL Classifications
G12 Q54 G24
Keywords
climate change carbon footprint factor model asset pricing disclosure
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Pages
39
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4064848
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