How easy is it for investment managers to deploy their talent in green and brown stocks?

TL;DR

This paper investigates the variability in future performance of green and brown stocks within the S&P 500, revealing decreasing heterogeneity over time and implications for investment managers' skill deployment.

Contribution

It introduces an analysis of performance heterogeneity based on greenhouse gas emissions, highlighting temporal changes and differences between green and brown stocks.

Findings

Approximately 20% of stocks show differentiated future performance.

Higher time-variation in performance opportunities within brown stocks.

Decreased heterogeneity over time, especially for green stocks.

Abstract

We explore the realized alpha-performance heterogeneity in green and brown stocks' universes using the peer performance ratios of Ardia and Boudt (2018). Focusing on S&P 500 index firms over 2014-2020 and defining peer groups in terms of firms' greenhouse gas emission levels, we find that, on average, about 20% of the stocks differentiate themselves from their peers in terms of future performance. We see a much higher time-variation in this opportunity set within brown stocks. Furthermore, the performance heterogeneity has decreased over time, especially for green stocks, implying that it is now more difficult for investment managers to deploy their skills when choosing among low-GHG intensity stocks.