Is There a Green Factor?

Climate change has far-reaching implications for the global economy and is increasingly being recognized by investors as a long-term investment theme. As more investors take note of companies that are well positioned to handle climate change, a common factor may account, in part, for the share prices of these companies. The authors search for the existence of this common factor, which they call the green equity factor. During the three-year period from May 2005 through May 2008, the authors find that a sample portfolio of renewable energy stocks outperformed the broad, global MSCI All Country World Index (ACWI), as well as a subindex consisting of traditional energy stocks. Their findings persist after adjusting for size, value, and country biases in the sample portfolio. Furthermore, a systematic analysis based on the Barra Global Equity Model supports the existence of a renewable energy risk factor. <bold>TOPICS:</bold> <ext-link>ESG investing</ext-link>, <ext-link>portfolio construction</ext-link>, <ext-link>factor-based models</ext-link>