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 55
OP 93
DO 10.3905/jesg.2022.1.062
VO 3
IS 2
A1 Andrew W. Lo
A1 Ruixun Zhang
A1 Chaoyi Zhao
YR 2022
UL https://pm-research.com/content/3/2/55.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.