SC Connecticut News

The debate over whether green investing yields higher returns has been ongoing, with varied opinions from asset managers and academics. A 2019 survey revealed that approximately 60% of asset managers believed environmentally and socially aligned investment portfolios would outperform the market in the next five years. However, academic research presents conflicting results regarding these expectations.

Theis Jensen from Yale School of Management explored this issue due to his interest in how subjective expectations influence asset pricing. He noted that previous research offered mixed conclusions: "Roughly half of the papers said that you got a higher return from investing in green assets," he observed, "and half of the papers said you got a higher return from investing in brown assets."

In collaboration with Marc Eskildsen, Markus Ibert, and Lasse Heje Pedersen from Copenhagen Business School, Jensen conducted a study replicating several papers on green finance using different measures of an asset's greenness. They tested these methodologies with actual stock returns across global markets. The findings indicated that results were sensitive to the specific greenness measure used and varied by market.

To address this inconsistency, the researchers developed their own methodology for creating a comprehensive green score, shifting focus from past realized returns to future expected returns. Their analysis showed that using their green score led to investors expecting 0.50% less annual return when investing in the greenest stocks compared to the least green ones. Corporate and sovereign bonds showed similar trends as their greenness increased.

Jensen commented on the belief within asset management circles about profiting while doing good: “There has been this idea in the asset management industry that you can ‘do well by doing good,’” he stated. “Our estimates imply that’s not true.”

Despite what might seem like disappointing news for advocates of green investing, Jensen maintains a positive outlook: “If you, as an investor, really care about the environment, then you should hope for a lower return on green assets than on brown assets,” he emphasized. “We want to make it cheaper for green firms to finance their projects and more expensive for brown firms.”