The role of a green factor in stock prices: when Fama and French go green

Ricardo Gimeno and Clara I. González

Abstract

For investors, climate change considerations have become pivotal, yet the absence of uniform standards and comprehensive data complicates the possibility of making informed investment strategies. By incorporating a green factor into the conventional framework for explaining stock returns, we can capture climate transition risk exposure. To do this we construct a portfolio that favors low carbon-emitting companies over their high carbon-emitting counterparts. Our findings reveal the factor’s market significance. Notably, this green factor serves as a proxy for the climate readiness of nondisclosing companies, making it an effective tool for investors to gauge climate change exposure. This research, therefore, bridges a crucial informational gap, aiding both portfolio management and the analysis of corporate climate risk exposure.