During the Inquire Europe Spring Seminar 2025 in Brussels, Dr. Markus Ibert, Assistant Professor of Finance at Copenhagen Business School and former senior economist at the Federal Reserve Board of Governors, presented the study “In Search of the True Greenium”, looking for the expected return difference between green and brown assets. The work seeks to identify whether green investing offers expected excess returns (a positive greenium) or if it comes at a cost (a negative greenium).
The central goal of the study is to quantify the greenium and assess its robustness. The stakes are high: the greenium affects investors‘ costs or rewards of green investing, corporate costs of capital, and the feasibility of green finance as a market-based alternative to policy instruments like carbon taxes. If divesting from brown firms and reallocating capital to green firms raises the formers’ costs of capital significantly, markets could shift behavior and accelerate climate goals. But to work, the greenium must be negative, economically meaningful, and persistent.
The research first tackles the existing empirical asset pricing literature, which is replete with contradictory findings. For instance, one study finds that green stocks underperform brown ones by 440 basis points annually, while another reports the opposite: green stocks outperform by 780 basis points. To resolve these inconsistencies, Ibert and co-authors conduct a large-scale replication study across 49 countries using 23 greenness measures (including carbon intensities and ESG scores) and a variety of portfolio construction methods and risk adjustments.
Key finding: realized green-minus-brown returns are centered around zero and not statistically significant once multiple testing adjustments (e.g., Benjamini-Hochberg) are applied. The reason? The sample period (typically 2008–2022) is simply too short to identify a greenium given the low signal-to-noise ratio of stock returns. Finding statistical significance with a Sharpe ratio of −0.1 (a greenium estimate implied by Ibert and co-authors’ use of forward-looking expected returns as opposed to realized returns) would require nearly 400 years of realized-return data. Thus, realized return-based inference is “futile” for estimating the greenium.
In the second half of the paper, the authors pivot to a more forward-looking framework. They develop a theoretical asset pricing model that incorporates investor disagreement about how to measure greenness. Investors assign different ESG scores based on their preferred metrics (e.g., carbon emissions vs. MSCI E-scores), and these heterogeneous preferences aggregate into an “average green score” in market equilibrium.
Using this model, they regress forward-looking expected returns (proxied by implied costs of capital) on this aggregate green score while controlling for traditional risk factors. They find a modestly negative greenium (i.e., green investing comes at a cost for investors): in the U.S., a one standard deviation increase in greenness lowers expected returns by 25 basis points. Globally, the estimate is around −30 basis points. A green portfolio (top tercile) underperforms a brown one (bottom tercile) by 50 basis points in expected terms.
Further findings:
- The greenium is larger in absolute magnitude in “greener” countries and has increased in magnitude over time.
- The expected return cost of shifting from a market-weighted index to ESG mutual funds is modest—about 5 basis points.
- The greenium is more pronounced in extreme tilts (e.g., coal vs. renewables).
- A modest greenium also exists in corporate and sovereign bonds
To conclude, the greenium is real—but modest. While ESG investing does entail a small expected return tradeoff, this alone may not be enough to replace policy tools like carbon taxes. Nonetheless, the study offers a rigorous and data-rich benchmark for future debates on sustainable finance, and a clear path for asset managers to understand the financial cost of green allocations.
View the research in full via : https://www.inquire-europe.org/event/joint-spring-seminar-2024-brussels/