Dissecting green returns

Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases environmental concerns, not expected returns. German green bonds outperformed their higher-yielding non-green twins as the “greenium” widened, and U.S. stocks brown climate concerns strengthened. Despite that outperformance, we estimate lower for than brown, consistent with theory. We two ways: ex ante, using implied costs of capital, post, realized purged shocks from earnings. A theoretically motivated factor explains much value stocks’ underperformance.