Abstract
This research paper investigates the long-term financial performance of firms investing in green technology, specifically those with lower greenhouse gas emissions or higher ESG scores. It highlights the gap in understanding how green technology investments affect firms over longer time horizons, compared to the more analyzed short-term stock performance. The study builds on the theoretical asset pricing model by Hirshleifer and Teoh (2003), focusing on the impact of pro-social investors and arbitrageurs on the pricing of green stocks. Initially, green stocks may be overvalued due to investor preferences, but as new information on technological improvements is gradually incorporated, these stocks can become undervalued, potentially leading to higher long-term returns. The paper introduces a structural measure of technological greenness based on a firm’s energy production from renewable versus fossil fuels, using a sample of utility companies between 2011-2021. This approach offers a more direct and reliable measure of greenness compared to ESG scores or GHG emissions. The findings reveal that greener firms, particularly those heavily invested in green technologies, earn higher long-term stock returns, with the cumulative returns increasing by 15% over five years for firms with higher technological greenness. The research also finds that greener firms are less risky, with lower market beta and more stable future performance, suggesting their higher returns reflect improved fundamentals rather than a risk premium. The study emphasizes the importance of market learning and gradual information dissemination, which can explain the return differential between green and brown stocks over time.Additionally, the paper discusses how firms’ disclosure of green technology correlates with stock returns, especially post-Paris Agreement, and how advanced financial systems enhance the market’s ability to price green tech firms. The findings underscore the need for a long-term perspective in evaluating green investments, as the full benefits of green technologies materialize slowly but offer significant value over time.
This research paper investigates the long-term financial performance of firms investing in green technology, specifically those with lower greenhouse gas emissions or higher ESG scores. It highlights the gap in understanding how green technology investments affect firms over longer time horizons, compared to the more analyzed short-term stock performance. The study builds on the theoretical asset pricing model by Hirshleifer and Teoh (2003), focusing on the impact of pro-social investors and arbitrageurs on the pricing of green stocks. Initially, green stocks may be overvalued due to investor preferences, but as new information on technological improvements is gradually incorporated, these stocks can become undervalued, potentially leading to higher long-term returns. The paper introduces a structural measure of technological greenness based on a firm’s energy production from renewable versus fossil fuels, using a sample of utility companies between 2011-2021. This approach offers a more direct and reliable measure of greenness compared to ESG scores or GHG emissions. The findings reveal that greener firms, particularly those heavily invested in green technologies, earn higher long-term stock returns, with the cumulative returns increasing by 15% over five years for firms with higher technological greenness. The research also finds that greener firms are less risky, with lower market beta and more stable future performance, suggesting their higher returns reflect improved fundamentals rather than a risk premium. The study emphasizes the importance of market learning and gradual information dissemination, which can explain the return differential between green and brown stocks over time.Additionally, the paper discusses how firms’ disclosure of green technology correlates with stock returns, especially post-Paris Agreement, and how advanced financial systems enhance the market’s ability to price green tech firms. The findings underscore the need for a long-term perspective in evaluating green investments, as the full benefits of green technologies materialize slowly but offer significant value over time.
Stefano Battiston, Irene Monasterolo, Maurizio Montone
CEPR discussion paper no. 19337
