RT Journal Article
SR Electronic
T1 Measuring and Optimizing the Risk and Reward of Green Portfolios
JF The Journal of Impact and ESG Investing
FD PMR
SP jesg.2022.1.062
DO 10.3905/jesg.2022.1.062
A1 Andrew W. Lo
A1 Ruixun Zhang
A1 Chaoyi Zhao
YR 2022
UL https://pm-research.com/content/early/2022/11/05/jesg.2022.1.062.abstract
AB We study the performance of green portfolios in both the US and Chinese markets, constructed using a broad range of climate-related environmental metrics, including carbon emissions, water consumption, waste disposal, land and water pollutants, air pollutants, and natural resource use. We compare several popular long-only and long–short green portfolio construction methodologies and find that a method based on Treynor–Black weights offers the most robust performance, thanks to its ability to quantify alphas for individual assets using only a small number of parameters. In the United States, green portfolios (e.g., low-carbon portfolios) have realized positive alphas in excess of Fama–French factors, a significant portion of which can be explained by an unexpected increase in climate concerns over the past decade, rather than positive expected returns. In contrast, Chinese investors have borne a cost for holding green assets instead of brown assets over the past seven years, implying a positive carbon premium, the opposite of US markets.