The Risk of Holding Non-Green Securities in Portfolio


The impact of sustainable investments on asset prices and corporate behavior is a crucial aspect in today's financial landscape. In the financial realm, two typical investment categories are distinguished: green and brown, both with distinct market characteristics. Interestingly, despite green assets exhibiting lower expected returns, the question arises as to why this is the case. Green assets show negative Jensen alphas, while brown assets exhibit positive alphas. This article aims to investigate the reasons behind this disparity.

The ESG Beta

A primary factor to consider is that green assets serve as insurance against climate risk, unless they fall under cases of greenwashing. An unexpected surge in ESGrelated concerns could lead to a shift towards green assets, potentially surpassing the expected returns of brown assets. Expected returns thus depend not only on market betas and investor preferences but also on ESG betas, evaluating corporate exposure not only to climate impacts but also to questionable business practices or controversies that could harm society. Some studies indicate that brown assets have higher climate betas compared to green assets (Choi et al., 2020; Engle et al., 2020).

Investor Outlook

Presently, it appears that retail investors do not adequately consider ESG factors, perhaps due to the term's excessive instrumentalization over the years. However, if the climate were to unexpectedly worsen, brown assets would lose value compared to green ones. Conversely, green assets exhibit superior performance when positive impacts involve the ESG factor.

Institutional investors consider climate risk as a significant investment risk variable. The 2020 letter from BlackRock's CEO, Larry Fink, emphasized the essential nature of assessing a company's impact on the environment for investment success. Furthermore, studies such as the one conducted by Ilhan et al. (2020) demonstrate that companies with higher carbon emissions display extreme risks and higher variance.


Recent market analyses suggest that green stocks involve lower risks. However, for investors, this translates to lower returns as they must compensate for the premium related to climate risk coverage. Because brown assets pose more risk, they need to offer higher expected returns. Despite ESG investors potentially obtaining a negative alpha, they benefit from an investment surplus: they sacrifice less return than they would be willing to in order to maintain a desired portfolio, which inherently holds lower risks.


Darwin Choi, Zhenyu Gao, Wenxi Jiang, Attention to Global Warming, The Review of Financial Studies, Volume 33, Issue 3, March 2020, Pages 1112–1145,

Emirhan Ilhan, Zacharias Sautner, Grigory Vilkov, Carbon Tail Risk, The Review of Financial Studies, Volume 34, Issue 3, March 2021, Pages 1540–1571,

Larry Fink, 'Larry Fink's CEO Letter.' BlackRock. 2020

Robert F Engle, Stefano Giglio, Bryan Kelly, Heebum Lee, Johannes Stroebel, Hedging Climate Change News, The Review of Financial Studies, Volume 33, Issue 3, March 2020, Pages 1184–1216,




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