In Search of the True Greenium

Abstract
The greenium—the expected return differential between green and brown securities—is central for ESG investors. Replicating the literature’s equity greenium estimates based on realized returns with 23 greenness measures, we find all estimates to be insignificant when accounting for multiple testing. Guided by a new theory, we propose an aggre- gate green score. This score combined with forward-looking expected returns yields a more precisely estimated annual equity greenium of −30 basis points per standard deviation increase in greenness. Consistent with theory, the greenium is more negative in greener countries and over time. Finally, we estimate greeniums for corporate bonds, weighted-average costs of capital, and sovereign bonds.