The real reason climate stocks lag the market

Hedging theory explains why green stocks have lagged AI hype.

This column is for Callaway Climate Insights subscribers only, but it’s OK to share once in a while. Was it shared with you? Please subscribe.

Hurricane Ida, seen from the ISS. Image: NOAA.

(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — It's now widely accepted (in academic circles at least) that the stocks of the greenest companies have lower expected returns than those of brown companies.

What’s been up for debate is why — at least until the recent release of a new study.

The explanation that previously made the most sense to me (and many others) is that climate-friendly investors have been willing to forgo some return in order to reduce green companies’ cost of capital. If so, that would have allowed those companies to undertake more climate-friendly projects than they would have otherwise.

Much of the historical data don’t support this so-called “investor preference” hypothesis, however, according to the new study.